Advantages And Disadvantages Of Time Value of Money – Merits of determining time value of money Project evaluation, financial decision making and implementation, project selection, firm pricing etc. are very important issues solved through time value concept of money.
So there are many Advantages to pricing Earth. It is discussed below that he cannot be called the real income of the organization. Rather the actual income is calculated as the value of income
In this article briefly discussed What are the benefits of pricing money? What are the advantages and Disadvantages the time value of money? And also Discuss price determinants when making money. Discuss the determinants of the time value of money. Lets see –
Advantages of Time Value of Money:
A. Real income computation: It is possible to calculate the future.
B. Determining rate of return: at the time of payment (Determining rate of return) Determining the rate at which the firm will be paid in installments on its borrowed funds is determined by the time value of the money. Does. Which includes the principal amount of the loan and the amount of interest. The thing is, what is the percentage of this interest
C. Determining the installment debts: In the previous discussion, it was noted that this is also determined by the value concept at the time of payment.
D. Managing risk: We have seen that more cash inflows are expected from more risky investments. However, proper risk management is very important. In this case, it is important to consider the value of time in order to determine the expected rate of return for risk measurement. If the risk increases. In that case the rate of butter will also increase.
E. Cash flows: Adequacy of cash flow is very important for an organization. Value of money plays an important role in determining the amount of cash inflows and outflows that will cause liquidity crisis in the organization. Similar post In this site, List of Careers in finance or Major Areas And Opportunities in Finance, What is the Science of Money Called and Who Is the Financial Manager?, History of Financial Management, What is Nature of Financial Management?
Disadvantage/ Difficulties / Limitations of Time Value Money:
Limitations of Time value Money is one of the most popular strategies for business people all over the world, so there is no problem. However, there are some limitations. As a result, it is difficult to apply this popular concept. Which is as follows:
A. Methodological complexity: The mathematical techniques used to determine the value of money are quite complex in nature. For which one has to depend on the person acquiring professional skills. If there is no skilled manpower then adverse results can come from this method.
B. Economic instability: Global instability and national economic instability prevent money from carrying the benefits of value perception. Because the financial market is in turmoil. As a result, there is a catastrophe in terms of interest rates, bank rates, repayment times, etc. For example, in the current (2009) global financial crisis, banks in Bangladesh have decided to reduce interest rates on deposits and loans.
C. Political instability: Political instability is a more widespread issue. As a result, there is no sector where there is no adverse effect. As a result, no strategy is effective then. The economy of Bangladesh for the next 2 years after 1/11 is one of the examples.
D. Changes in government policies: Interest rates are one of the determinants of the value of money. The government controls the country’s money market. As a result, this idea is not effective due to changes in various government policies. Such as- sudden change in interest rate etc.
E. Present value not being correct: One of the prerequisites for determining the current value of money received or paid is the correct butt rate. Which is not often found. As a result, the current value determined by the estimated butt rate is not accurate. Similarly, future prices are not accurate.
F. Compactity in determining appropriate discount rate: Determining the appropriate buttered rate with risk is a complex process. This is because the risk-adjusted betra rate is determined by adding the risk premium or risk reward along with the risk-free income rate of a more risky investment project evaluation.
As a result, there is a possibility of error in this strategy. OO are the demerits or limitations of time value of money concept?
Determinants of Time value of money:
Determinants of Time value of money The time value of money changes with time. This is a constant truth. However, there are a number of recognized regulators that determine the amount of total receivables or payments according to that rate of change. We call them the determinants of time.
The present value or future value of a certain amount of money depends on these factors. The risk free rate of retum, the nature of the rate of inflation, the nature of the rate of interest, the number of compounds, the time, etc., affect the value of money in a country. However, many people want to leave the whole matter to the time preference for money. The details of these determining elements are given below.
A. Rate of interest: Rate of interest has a direct and definite effect on the variability of price over time. Which is called the batter rate. Butter rate determines the current and future value of a certain amount of money. However, there is an inverse relationship between the current price and the rate of butter.
B. Time or period: It is considered as one of the elements in determining the time value of money. Time plays a satisfactory role only when (other determinants remain constant) the relation of the present value to the time or period is opposite but it is equivalent to the future value
C. Nature of interest: The time value of money depends on the amount of interest that a borrower will pay to the lender as a result of the use of borrowed capital. For example, if simple interest is used, then the present or future value changes in the same way, but if compound interest is used, then the value of money changes in different ways. Therefore, it can be said that the nature of interest is also a consideration factor in determining the value of money.
D. Rate of inflation: It is universally acknowledged that fluctuations in the rate of inflation lead to a change in the price level and purchasing power, which greatly affects the value of money. The rate of inflation is considered more important in determining the interest rate when raising liable funds.
E. Number of compounding: There is a wide correlation between the decrease in the number of compounding and the present and future value. If the number of compounds per year is higher then the future value increases. However the current price decreases. Alternative post – Principles of Business Finance. Top Two Types Of Finance. Importance of Business Finance, Break – Even Point Analysis A to Z, Goal of the financial manager, What Is Bond? Discuss A to Z.
F. Risk free – Rate of Return: In every country in the modern world, the interest rate on government bonds or Savings Certificates or different term deposits of different banks is called Risk Free Rate. The rate of discount or interest rate (Rate of interest) is determined by considering the rate of direct risk-free return.
Therefore, the effect of risk free rate of return is a consideration in determining the time value of money.
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