Question

"Time Value of Money "

The time value of money is a critical concept to understand in accounting, especially when dealing with loans, investment analysis, and capital budgeting decisions. The time value of money concept can be used to decide which projects to start and what investments to make. You can also utilize the time value of money concept in your personal life.

Provide two (2) decisions you may need to make that could involve the time value of money. Explain the how the importance of the time value of money will factor into your decision-making process.

Answer 1

Time Value Of Money

In the simplest words, Time value of money or TVM indicates the decreasing worth of money with respect to time. TVM states that money that is available at present is worth more than the same amount in the future, due to its potential earning capacity. This center standard of account holds that gave cash can gain premium, any measure of cash is worth more the sooner it is gotten. One of the most fundamental concepts in finance states that money has a time value related to it.

Examples of Time Value For Money:

Concepts are understood more easily with the help of real-life examples. So, let’s pick some real-life scenarios to get hold of the TVM concept in a better manner:

Example 1:

Suppose you have a friend who gives you two offers:

• Either he will pay you $1000 today
• Or he will pay $1050 a year later

Now, assuming that there’s no risk involved, whatever offer you choose should depend upon the return you can earn on your money.

In the event that you can gain 6% on your cash, for example, at that point, you ought to acknowledge the $1,000 today. Whenever contributed for one year, it would develop to $1,060, beating the choice of getting $1,050 one year from now.

Be that as it may, on the off chance that you can just acquire a 4% return on your cash, you ought to acknowledge the idea of $1,050 paid one year from now. On the off chance that you acknowledge the $1,000 and contribute it at a 4% return, it will just develop to $1,040 in one year, contrasted with accepting $1,050 following one year from your companion.

Example 2:

For instance, assume a speculation worth of $100 with 5% enthusiasm for one year, subsequent to finishing the entire one year the cash will reach $105 ($100 duplicated by 1.05), when coming in inverse heading $100 got one year from now is just worth $95.24 today, ($100 partitioned by 1.05), with the suspicion of 5% premium.

.................sk