What are some of the business applications of the time value of money, and what are some of the personal finance applications of the time value of money?
What are some of the business applications of the time value of money, and what are some of the personal finance applications of the time value of money?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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What are some of the business applications of the time value of money, and what are some of the
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Business applications of the time value of money
Time value of money has applications in different areas finance and its scope is very large. It describes how money today is worth more than money tomorrow. It calculates the future value from an investment in today's monetary terms to describe the actual worth of that investment or project. Some of its applications include:
- Capital Budgeting- It helps in decision making of the top management regarding which investments would be beneficial for the company in the future. It calculates the sum of present value of cash flows from different projects to derive the worth of the project and whether it would be profitable for the business or not. It takes into account the net present value derived from a project and helps top managers to choose best investment from the rest for the company.
- Future value-Time value of money also takes into account money in today's terms and calculate future worth of that money. It helps to derive the future worth of that investment to compare it in terms of money today and make decisions regarding investments based on that future value.
- Bond valuation-Businesses also invests in bonds as they are less risky investment and get regular interval of interest payments from that bond. Time value of money assists businesses to buy that bond which has present value more than its par value. It means that benefit from that investment should increase the price paid for it.
- Stock valuation-Businesses also timely invest in equity shares of a company as they could yield higher return. Time value of money assists to calculate the intrinsic value or present value of that share in today's monetary terms.
- Capital recovery-Time value of money calculates the recovery time of capital invested in a project through methods like payback period or discounted payback period.
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