Week 4 Discussion
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Week 4 Discussion
Marc Herbes Genannt Beckmann
University of Cumberlands
BADM-534-M20 Managerial Finance
Prof. Miller
2/4/24
Paper Title in Bold at the Top of Page 2
The context of time value of money is important in the corporate context because the value of money is always increasing. Just as the book explains, money grows over time. The dollar earned today could be more if it was invested, for instance (Ehrhardt, M. C., & Brigham, E. F. 2023). Specifically the process of compounding. In a corporate setting, it is important to know where to allocate the capital that was earned. This, in turn, means that the invested money compounds and increases over time. This is then a steady increase in assets and value for the corporation. Long-term investments are another application of corporations increasing the value of their capital over time. The more value added to the corporation, the more it will be worth over time. Another aspect as well is selling time. In my line of work, time equals money because when a project is budgeted it includes engineering time. The more time allocated to the project, the more engineering time will be added. While this is not quite the same as money increasing over time, like with compounding, it is still a value-added with respect to time. As is written by the (
Time Value of Money, TVM
) article, inflation is also another aspect of time value of money. Inflation increases prices of raw materials and other important products. Meaning that investments made in materials that the corporation needs if they are selling physical goods is important. The earlier the investments are made the more the save in the
long run while they can increase the price of the final product accordingly.
As project financing is a risk, time value of money can go either way. As the project is being financed from the cash flows and equity there is always a risk involved. This means that usually, it's for large projects where, over time the lenders and lessors will be paid back (Ehrhardt, M. C., & Brigham, E. F. 2023).
Short-term and long-term is really important when it comes to management practices in relation to corporate funds. Management needs to make sure that the funds are allocated correctly depending on which one. Long-term projects might not be as profitable but focus on sustainability; on the other hand, short-term projects and allocations of funds heavily emphasizes
profits and cash flows.
All this comes together to display the concept of time value of money and how it is important to be understood and put into practice for corporations.
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References
Ehrhardt, M. C., & Brigham, E. F. (2023). Corporate Finance: A Focused Approach (8th ed.). Cengage Learning US. https://reader2.yuzu.com/books/9780357714713
Time Value of Money (TVM) - Definition, Formula, Example.
(n.d.). Corporate Finance Institute. Retrieved February 5, 2024, from https://corporatefinanceinstitute.com/resources/knowledge/finance/time-value-of-money/
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