Time value of money, Financial Management

TIME VALUE OF MONEY

Time value of money can be described as the value of a unit of money at different time periods.  It involves that the value of a unit of money is not same at different time periods. That is, the value of a sum of money received today is more compared to the similar sum of money received after some time.  On the other hand, the total amount of money received in future is less in value than it is today. The time value of money is also identifies as time preference of money.  Time preference of money is an individual's favorite for possession of a given amount of money now, rather than the similar amount at some future time. There are three reasons for this behavior. They are - i) Subjective preference for consumption ii) Risk due to the uncertainty of cash flows and iii) Availability of investment opportunities.  The time preference for money is generally expressed in terms of a rate of return or discount rate. The expected rate of return (ROR) as also the time value of money will change from individual to individual depending on his/her perception.  In order to develop meaningful comparison between future cash flows at different time periods, it is essential to convert them to a common point in time.  This is completed through two popular approaches -

i)                    Compounding technique and

ii)                   Discounting technique.

Posted Date: 10/15/2012 8:52:21 AM | Location : United States







Related Discussions:- Time value of money, Assignment Help, Ask Question on Time value of money, Get Answer, Expert's Help, Time value of money Discussions

Write discussion on Time value of money
Your posts are moderated
Related Questions
All the bonds are not making periodic coupon payments. Zero-coupon bonds are those bonds where the bondholder realizes interest by buying it at a deep discount to its face

Joe's ice cream stroe has to decide whether to shut down this winter or stay open. His projected revenue is $1,200 per week. He has fixed costs (Mortgage, taxes, insurance, etc.) t

Partition of Investment Risk The expected returns and the fluctuation in returns are two factors in evaluating investments. Expected Returns While the actual returns

Many practitioners feel that instead of using only on-the-run issues, all treasury coupon securities and bills are to be used for constructing the theoretical spo

who are the participants in the hedge funds industries

Inventory T ur nover In the accounting, a measure of the number of times that the average amount of inventory on hand is sold within a given time of period. In the o

#What are the food and beverages industry financial ratios for 2011,2010,2009? 1. Liquidity(current/quick), Asset Management(Inventory Turnover, total assets turnover),Debt Menagem

Question 1 (a) These are merely the differences of the two prices. Consequently the mark to market losses are given by { Q 1 - Q 0 ,Q 2 - Q 0 ,Q 3 - Q 0

Pull Strategy Pull strategy define a marketing approach in which a manufacturer promotes a product directly to consumers in the hopes that the consumers will then request

What are a bank's primary reserves? When the Fed sets reserve requirements, what is its primary goal? Vault cash and deposits in the bank's account at the Fed are employed to s