Time Value of Money
Introduction
The goal of every organization is to grow and expand within its industry. Milton Freidman, Noble Prize winner for Economics, stated that “There is one and only one responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game” (Quotes, 2007). In order to ensure that business endeavors and projects are going to increase profits and the value of the organization, financial managers look at the time value of money. The time value of money is a tool to understand the effective rates on business loans or the true return on an investment by helping the manager determine the actual value of money now and in the future based on interest rates, discount rates, expected costs, and expected sales. Through targeted analysis, organizations are able to use this information to decide whether projects, big or small, simple or complex, are going to be beneficial to the company. By observing various tools and indicators such as future value, present value, future value of an annuity, and present value of an annuity, companies can determine the expected return on an investment to ensure that it will result in increased profits.
Time Value of Money
The time value of money concept implies an inclination in collecting a certain amount of money today or at a future date from now, the money anticipated at a future date from now should be in greater amount than the collectable amount today. This concept also means that dollars collected today are valued more than future dollars because one can begin to earn interest immediately. Most people would prefer to receive $10,000 now than defer payment into the future. The ...