Question

The concept of time value of money has numerous "real-world" applications. Some of the applications range from calculating the payment for a car or mortgage to estimating what interest rate is needed on an investment to send your child to college in 20 years.

In your discussion, respond to the following two questions:

• Do you believe the concept of time value money is important in ordinary business relationships? Explain.
• How would you use a concept of time value to determine the value of the business?

For your initial post, please respond with a minimum of 150 words. This will allow your instructor to ascertain whether you completely understand the concepts covered.

Answer 1

Time value of money is essentially used to calculate the value of money which would be applicable now or in future for a particular goal, project costing etc.

In ordinary business relationships it is important to understand how much the business would produce or gain from a project going forward. This would also help to understand and ascertain the future value of the project and cash flows and hence the profitability of the project. Also the Net Present Value which can be calculated can be helpful in suggesting whether the project is profitable and also whether it can be taken up or not.

We can forecast all the parameters in the financial statements of the company. We can forecast sales, net profits, assets, liabilities etc. All these are done based on certain necessary presumptions after studying the company's past performance, business streams, industry outlook etc. Also the company's con-call transcripts , company annual reports are studied. Once this is done and all the forecasts are done we ready a financial model. using the forecasts we finally forecast the cash flow. This is then discounted using certain rate to calculate the present value. This is where time value plays a very important role. Thus this present discounted value then helps us to determine the value of the business.