Time Value of Money
The Basic Law in Finance Time Value of Money We earn money to spend it and we save money to spend it in the future. However, for most people spending money in the present time is more desirable since the future is unknown. We can gratify the desire to spend money today rather than in the future by knowing the basic law in finance time value of money. This means that a dollar today is worth more than a dollar at some time in the future. Unfortunately, people very often want to buy things at the present time which cost more that what they earn, so they pay with credit cards or take out loans which have to be paid off at some point in the future. In this paper we will discuss the present value of money, the future value of money, compounding effect of money, and annuities. Knowledge of this basic time value of money principles and calculations is crucial for making sound financial decisions in business as well as in our personal lives. Looking at the borrowing transaction from the borrower's perspective, there are consumers and businesses (not to mention the deficit-ridden government) who really need that dollar today and who are willing to promise to pay back more than that dollar in the future. Businesses can invest borrowed funds in capital to hopefully create profits which are more than sufficient to repay the borrowed funds (principal) plus interest. Consumers and governments borrow for various reasons but are expected to have income in the future sufficient to repay principal and interest (Understanding the Time Value of Money).
The time value of money has applications in many areas of Corporate Finance including capital budgeting, bond valuation, and stock valuation. Furthermore, the time value of money concepts can be grouped into two areas: Present Value and Future Value. Present value describes the process of determining what a cash flow will gro to in the future. Future value describes the process of finding what an investment today will grow to
The time value of money has applications in many areas of Corporate Finance including capital budgeting, bond valuation, and stock valuation. Furthermore, the time value of money concepts can be grouped into two areas: Present Value and Future Value. Present value describes the process of determining what a cash flow will gro to in the future. Future value describes the process of finding what an investment today will grow to
References: Brealey., Myers., Marcus. (2003). Fundamentals of Corporate Finance. 4th Ed. The McGraw-Hill Companies. Retrieved October 16, 2004 from University of Phoenix e-resource Understanding the Time Value of Money. Retrieved October 16, 2004 from http://www.free-financial-advice.net/time-value-of-money.html The Time Value of Money. Retrieved October 16, 2004 from http://www.busadm.mu.edu/mandell/tvm.html