Analyze the role time value of money plays in managerial finance AND the financial decisions of...

Analyze the role time value of money plays in managerial finance AND the financial decisions of a company’s creditors/shareholders

Expert Solution

Meaning of time value of money :

The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value.

Time Value of Money Formula

Depending on the exact situation in question, the time value of money formula may change slightly. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or less factors. But in general, the most fundamental TVM formula takes into account the following variables:

FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years

Based on these variables, the formula for TVM is:

FV = PV x [ 1 + (i / n) ] (n x t)

The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future.

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