Question

TOPIC:

Why is the concept of time value of money and the discounted cash flow valuation so important to financial managers, corporations, and many other users of these concepts?

Answer 1

The time value of money is an important concept in finance. This concept focuses on the fact that money earned today has a greater value than money earned in the future. This will depend on the opportunity cost of capital. Managers and corporations as well as investors consider the time value of money for making decisions such as Capital Investments, return on investment and retirement planning. Capital Investments for example require huge amounts of funds which remain locked for a long period of time. More over businesses are faced with different options and they need to choose the correct option which will give them a higher return. For this purpose they use time value concepts to analyze different options by comparing the present value of cash flows associated with these options. Similarly investors use the time value concept to analyze the different investment options and select the one which gives them the greater future value.