Answer to Question #294366 in Management for Getahun

Question

what time value of money in financial management

. Introduction

.Type

.Benefit

.Conclusion

Answer 1

What time value of money in financial management

Introduction

Time value of money is defined as “the value derived from the use of money over time as a result of investment and reinvestment”. Time value of money means that “worth of a rupee received today is different from the worth of rupee to be received in future”. It means that a sum of money is worth more now than the same sum of money in the future. This is because money can grow only through investing. An investment delayed is an opportunity lost.

Type

Net present value lets you value a stream of future payments into one lump sum today. It measures you value of money in future at the present time.

Future value gives you the future value of cash that you have now.

Benefit

Time value of money is important because it helps investors and people saving for retirement determine how to get the most out of their dollars. This concept is fundamental to financial literacy and applies to your savings, investments and purchasing power.

Conclusion

Financial managers have to put time value of money in their decision making process. In such, it will help make better decisions and allows for timely and prudent planning. It is perhaps the foremost concept when it comes to financial planning. If you can't appreciate the damage inflation can inflict on purchasing power of your assets, it is difficult to plan your finances well.