Question

Examine 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

Concept of Time Value of Money

The concept of Time value of Money states that is worth more in future due to its potential earning capacity.It symbolises the importance of time in growth of money. In relation to corporate managers, this concept of finance is very important. Corporate mangers are helped by this concept in order to chose right investments ,opportunities and ratio of their investments in different sources.

Methods in which Time Value Of Money can help Corporate Managers

1. Compounding : This concept of time value of money is very dominant as it provides us the knowledge of growing of money in a U-shape graph. This concept says that if money M invested at a time t will grow at a rate r. At t+1 it has some interest I and if we invest it again at a interest rate of r for time t we get growth overall including its interest earned that is (M+I ) and we see a positive growth .

2.Discounting : Discounting is a same process as compounding but in backward / reverse process. It shows the negative impact of money if losses are there that may decline the money significantly ( same as it grows in compounding;same it declines in discounting.