Question

most financial decisions,personal as well as buiseness, involve the time value of money. Discuss the importance and application of time value of money with daily life examples.

Answer 1

Time value of money is one of the most important concept of the financial world which will be advocating that the similar amount of money today will be having higher value than similar amount of money tomorrow.

Time value of money will be advocating that value of money will be depreciating over time because of factors like inflation and changes in the interest rates and passage of time, so it could be said that with time value of money will be depreciating due to various macro factors and one should be trying to account time value of money before making various kinds of investment and financial decisions.

Importance and application of time value of money would be that time value of money is highly important in day to day investment and it is also important in making financial decisions because there is always capital budgeting decision making after discounting of time value of money because net present value and internal rate of return will always be discounting the cash flows which are accruing to the company in the future and they will be discounted at the present in order to arrive at the true value of those money, so time value of money should always be applied in various aspects of life of an investor also because when the investor will be trying to value a company through discounted cash flow method or other enterprise value method he would be trying to discount the cash flows available to the company and the profits which are available to the company's so that he could make a better investment decisions and it can be said that time value of money is a very important concept in the modern financial world and it is having a very high implication in decision-making because it is a practical concept which is applicable through the investment and financial walk of life as value of money will be depreciated over the time due to factors like inflation and interest rate so it can be said that time value of money should never be avoided while making decisions related to investment and financing whether by a company or by an individual