Question

Examine the concept of the time value of money in relation to corporate managers. Propose two (2) methods in which time value of money can help corporate managers in general.

Answer 1

Time Value of Money is a concept that recognizes the relevant worth of future cash flows arising as a result of financial decisions by considering the opportunity cost of funds.

Money loses its value over time which makes it more desirable to have it now rather than later.

There are several reasons why money loses value over time. Most obviously, there is inflation which reduces the buying power of money.The financial manager must appreciate this fact and understand why they are different and how they are made comparable.Many financial decisions of the firm require a consideration regarding time value of money. The corporate manager must always concentrate on maximizing shareholders wealth. Maximizing shareholders wealth, to a larger extent, depends on the timing of cash flows from investment alternatives. In this regard, time value of money concept deserves serious considerations on all financial decisions.

There are different methods of calculating the time value of money.here, as per requires answer let's have a look at two different methods:

1) Calculation of the present value :- in this the worth of the future sum is given and the specified rate of return is been shown. It has lots of variations in this is that the future cash flow are discounted at the discount rate and it also represents the low present value of future cash flow. 2) Discounted cash flow:- in finance it is the analysis of a method which talks about the value of the project, company and the asset which is being used using the time value of money. In this all estimation has been taken and discounted for the present value as it shows both incoming and outgoing. This kind is used for investment of the finance and used for financial management.