How is TVM used in business?
The time value of money is the concept that money received today has a greater value that money received in the future. This is true because money you have today can be invested, which can appreciate or earn interest. The calculations of the time value of money are important because they give companies the ability to compare investment options. This can help improve return on equity and increase shareholder wealth. The most simple example of the time value of money is a savings account. When a person deposits money into a savings account it will generate interest. This simple opportunity makes money worth more now than it would be in the future. TVM is calculated by comparing the future value of money (FV) to its present value (PV). This can be used to determine the present and future value of annuities, as well as simple interesting earning accounts, such as the saving account. When making calculations it is important that the correct discount rate is used. If the rate is not accurate it will cause the resulting calculations to be inaccurate as well. The formulas for present value and future value can be arranged to solved for any variable in the equation.
Sunday, March 22, 2009
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