Question

• What is the concept of the time value of money in relation to corporate managers? Propose two methods in which time value of money can help corporate managers in general.

Answer 1

Time value of money is very important concept of taking various investment decision in regards to corporate managers because corporate managers will be trying to discount the value of various projects according to time value of money and these Investments are selected based upon this analysis of time value of money so this is a crucial factor in decision making.

Time value of money will help these manager to find out the value of various alternatives they are going to undertake in order to maximize the value of the company by earning higher amount of profit and they will be trying to ascertain the best possible alternative based upon the cash flow which are generated after being discounted at the present value.

Two methods in which time value of money can help managers are net present value method in which various alternatives are discounted at the current juncture in order to select the best possible alternative which is generating higher amount of net present value.

Another method of application of time value of money would be discounted payback period method in which a manager will be trying to receive the initial investment of a project quickly by discounting it through the time value of money and they will be trying to equalise the cash inflows which are discounted with the cash outflows in order to arrive at payback period and which are suitable to maximize their value of overall project leading to maximization of value of firm.