Question

Explain what is meant by the time value of money, and discuss its relevance to the capital budgeting process.

Please type out and use a different answer in your own words that differ from what's already on the Chegg database, please and thank you!

Answer 1

Explain what is meant by the time value of money?

TIME VALUE OF MONEY-

• Time value of money is concept for calculation of future value for current investment.
• For example - a dollar today is always worth more then a dollar tomorrow.
• Investor invest there money due to its potential earning capacity.
• A bank pay interest on deposit for this the core principle is time value of money.
• Two factors in time value of money is the timing of the cash flow and the size of the cash flow.
• Formula for time value of money is

  FV = PV *(1+ i )^n  

where - FV= Future Value

PV =Present Value

i = interest rate per period

n= number of period

• TIME VALUE OF MONEY EXAMPLE- if a person deposit 10000$ for one year at 10% interest. in this case the time value of money or future value is:

FV= $10000*(1+(10%/1)^(1*1)

FV= $11000

THE TIME VALUE IMPORTANCE IN CAPITAL BUDGETING PROCESS:

• The time value of money is best determine for both individuals and businesses to bring about future economy growth.
• In the time of analyzing investments opportunities we use the time value of money calculations.
• Capital budgeting process is a long term decision for business so by using time value of money businessmen can tack better decision for business because it is related to the time of cash flow and the size of cash flow.