Question

What is the Time Value of Money and how do financial managers use it to make business decisions?

Answer 1

According to the time value of money, money earned today is
worth more than money earned in the future.
Money is worth more today because money can be invested
today and that money can grow over time depending on what the
interest rate is.
In other words, if you know the future cash flow you can discount it
to the present using the given interest rate.
For example, if a financial manager has to decide between two investments
that generate cash flows in the future and have the same initial investment. The discount rate is 12%.
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 12% and t is the time period in years.
PROJECT A
	Year	1	2	3	4
	cash flow	8000	6000	7000	6600
	present value of future cash flow	7142.857	4783.163	4982.462	4194.419
	Sum of present values	21102.9
	The present value of the future cash flows is $21102.9.
PROJECT B
	Year	1	2	3	4
	cash flow	18000	11000	12000	14000
	present value of future cash flow	16071.43	8769.133	8541.363	8897.253
	Sum of present values	42279.18
	The present value of the future cash flows is $42279.18.
Since the present value of future cash flows for project B is greater than the present
value of future cash flows for project A, the financial manager
will choose project B over project A.