Question

In: Accounting

What is time value of money? Whu problems may arise if time value of money is...

What is time value of money? Whu problems may arise if time value of money is not taken into consideration while making transactions? Explain theoretically how can these problems be dealt with?

Solutions

Expert Solution

Time Value of Money: means money has its time value. A rupee today is more valuable than a rupee a year hence. To express the time value of the money rate of interest plays a very important role.

The following problems may arise if the time value of money is not taken into consideration while making transactions:

  • Inflation: When there is inflation, the value of currency decreases over time.
  • Risk: Risk of Uncertainty in the future lowers the value of money.

In the absence of time value of money, while making transactions the major effective factors like inflation, risk will get neglected. Hence, we will not able to make an accurate conclusion.

We can deal with this problems by applying the time value of money

Suppose you are offered the choice between having Rs.10,000 today and having Rs, 10,000 at a future date, you will usually prefer to have Rs, 10,000 now. Similarly, if the choice is between paying Rs. 10,000 now or paying the same Rs. 10,000 at a future date, you will usually prefer to pay later.

In the first case by accepting Rs. 10,000 early, you can simply put the money in the bank and earn some interest. Similarly in the second case by deferring the payment, you can earn interest by keeping the money in the bank.

Therefore, the time gap allowed helped us to make some moey. This incremental gain is time vlaue of money.


Related Solutions

Explain the concept of value-for-money, describing the problems which may arise in applying the VFM model...
Explain the concept of value-for-money, describing the problems which may arise in applying the VFM model and suggest how the problems might be overcome.
What problems may arise in a democratic society?
What problems may arise in a democratic society?
What are the ethical problems that may arise during the end of life care
What are the ethical problems that may arise during the end of life care
First in time rule for charges does not resolve the dispute that may arise. What are...
First in time rule for charges does not resolve the dispute that may arise. What are your views? Give reference to case laws.
"Time Value of Money " The time value of money is a critical concept to understand...
"Time Value of Money " The time value of money is a critical concept to understand in accounting, especially when dealing with loans, investment analysis, and capital budgeting decisions. The time value of money concept can be used to decide which projects to start and what investments to make. You can also utilize the time value of money concept in your personal life. Provide two (2) decisions you may need to make that could involve the time value of money....
"Time Value of Money " The time value of money is a critical concept to understand...
"Time Value of Money " The time value of money is a critical concept to understand in accounting, especially when dealing with loans, investment analysis, and capital budgeting decisions. The time value of money concept can be used to decide which projects to start and what investments to make. You can also utilize the time value of money concept in your personal life. Provide two (2) decisions you may need to make that could involve the time value of money....
What is "Time Value of Money" relating to economics?
What is "Time Value of Money" relating to economics?
Time value of money
How many years will it take for $136,000 to grow to be $468,000 if it is invested in an account with an annual interest rate of 8%?
Calculate the following time value of money problems: If you want to accumulate $500,000 in 20...
Calculate the following time value of money problems: If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%? What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%? What is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years? If your company purchases an annuity that will pay $50,000/year...
Advanced Time Value of Money Problems Your child was just born and you are planning for...
Advanced Time Value of Money Problems Your child was just born and you are planning for his/her college education. Based on your wonderful experience in Financial Economics you decide to send your child to Hofstra University as well. You anticipate the annual tuition to be $60,000 per year for the four years of college. You plan on making equal deposits on your child’s birthday every year starting today, the day of your child’s birth. No deposits will be made after...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT