Question

4) Money with its time value is what you believe in. Comment.

Answer 1

Money has a certain time value which is important for investors. This is because the value of money at present is different from the value of money in future. Money received today can be used to invest and earn a certain amount of interest. Also due to inflation the value of money in the future is actually lesser than the same amount of money received today.

There are two concepts in the time value of money which are present value and future value. Present value represents the today's value of cash flows which are going to be received in the future. It discounts the future cash flows using an average expected rate of return and a specified period. This implies that the specified present sum of money will grow into a future amount if it is invested at the specified expected rate for the given number of periods.

Future value represents the amount that a cash flow received today would grow into the future given a specific interest rate. The future value also takes into account the impact of inflation and the impact of compounding interest as well as capital gains.

The time value of money is of importance when considering various investment options. It is also important in capital budgeting and helps firms to decide whether an investment/project is worth pursuing thus making the bets choice.