Question

Time value of money is one of the most important concepts in Finance. It is applied very frequently by finance professionals in corporate finance, investment management, retirement planning etc... Give an example of the application of Time Value of Money in one of these professional situations.

Answer 1

Answer:

Time value of money- Time value money is very important concept in finance, business as well as our personal life. Time value money concept says that money loses its value as the time passes. $100 of today will not be same after 5 years. Today you can buy 1 gold ring in $200 but the same ring you won't be able to buy in $200, it may cost you more like $220 or so. Same with the prices of commodities that you can buy today the same volume, you can't buy after 5 years or so.

Time value is the value of money as the time passes. Purchasing power of money decreases as the years pass. This concept is used in practical world also.

Examples:

Present Value- Present value is the value of goods or any investment at present. Managers calculate present value of the future cash flows that they will receive from some project in future. Future cash flows are discounted with the help of present value factor to know the accurate current value.

Formula:

Present Value = Future value / (1+r)ⁿ

Where r is discounting factor and n is number of years/periods

Future value- Banks and financial companies calculate future value of investment with the help of interest rate and inflation. They calculate the value of sum of money that will be received after a certain period of time in the future like retirement fund or fixed deposit.

Future value = Present value (1+r)ⁿ

Answer 2

Which of the following manager responsible for capital expenditure in organiZation? A- financial controller B- CEO C- treasurer D-all of above