Question

Explain, the concept of the time value of money in a relationship to both the simple direct investment and timing for maximizing the value of a corporations excess cash as well as for cash flows of projects and capital/project investment analysis. Be sure to discuss the limitation of time value analysis in terms of the component financial data points used in the underlying formulas and financial analysis results.

Answer 1

Time value of money is a concept which underlies that the value of money is not same every time as there is a cost associated with inflation and that will pulldown the purchasing power of money.the same amount of money today is greater than same amount of money tomorrow in value because of time value of money concept.

In the case of direct investment it is said that one should be investing after considering the time value of money as there are cost of inflation and cost of interest associated with value of money so it goes on depreciating even if it is stored.

A corporation can also maximize the value of its excess cash by investing through the time value of money as one can see that time value of money concept has higher implications in capital budgeting decisions where net present value or internal rate of return make decisions through time value of money in which they discount the cash flows related to a project after considering discount traits related to time value of money.

a company should diversify its investment in order to gain from time value of money as only such investment of preferred which beats the rate of inflation in order to have a net positive return.

the major limitation related with time value of money is timing of the cash flows at the risk associated with the time value of money as one cannot accurately and precisely predict the value of the cash flows in the future.