The huge change in the receipt that comes from the time value of the money comes from a concept that allows a financial manager to make financial and investment decisions.
We know that the goal of any firm is to maximize profits or wealth means an object that never falls lazily. Moving this object is one of the main tools for investing. The time value of money has a huge impact on the firm achieving this goal. There is a link between the time value of money and the cash choice theory.
We know that a person prefers to receive 1 $ today without expecting 2 $ quarter tomorrow, this is the theory of cash choice. In other words, time is being given importance with the receipt of money.
This is how the concept of value when it comes to financial decision making has been established. It is up to a firm to increase the value of money in the future.
From which the future receipts will be determined by the time value theory of money. With the passage of time the financial manager makes a variety of future decisions and the reasons from his financial decisions are manifold. In general, from earning power, inflation and uncertainty.
For example, massive investments in acquiring fixed assets are expected to pay off over time. At the same time the firm has to take loans from various sources. Similar content: 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?
Such as issue of shares or debentures, banks or any other financial institution. There is cash inflow to the firm for the funds raised but there is also cash outflow from the firm to repay the principal of interest, dividends and loans in the future.
In this case, the financial manager makes such financial decisions on the basis of comparing cash inflows and cash outflows. Time is a criterion that a financial manager considers the main consideration in the process of comparison. The notion of value at the time of money is relevant and meaningful here. Fixed Income
In this Article we briefly discussed Definition of Time Value of Money, the importance of the time value of moneys concept. Or, discuss the importance of the problem value of money when making financial decisions, Discuss the importance of time value for decision making. Or, discuss the importance of the value concept when making money. Discuss the importance of time value concept. Or, discuss the financial application of time value of money. Lets see –
Definition of Time Value of Money:
E.A. Kolb says, “If this amount of money received late is now accepted, the fact that its current value is higher is actually called the value of money.”
Bentorn says, “Time value of money refers to the fact that the same money return has a higher present value The principle that money received in the present is worth more than the same amount received in the present. in the future”.
According to MY Khan and PK Jain, “Time value of money means that the value of a sum of money than the same amount at some future time is called time value of money.”
IM Pandey says, “An individual’s preference for possession of a given amount of cash now, rather than the same amount at some future time is called time value of money. “The matter can be clarified with the help of an example.
For example, if a creditor is told to pay 100 rupees today instead of 100 $, he will be paid a total of 105 $ at 5% interest after 1 year. He will not accept it because it will be money. Price 95 rupees and future price 105 $. After 1 year the present value of 100 $ will be (100 x 0.952) = 95 $ and future price (100 x 1.05) = 100 so it can be said that
Importance and Necessity of Time Value of Money:
Importance and necessity of time value of money is one of the tasks to consider time in any financial decision making. Because acceptance depends on financial decision and accuracy, any organization is moving towards the future. So there are multiple requirements for making financial decisions considering the value of time.
The importance and necessity of pricing money is discussed below:
A. Project evaluation and selection: A firm selects the most suitable project from many similar alternative projects before making its investment decision. It is important to evaluate the projects in the right way for more suitable actual selection.
One of the means of evaluating the project is the 4 net current price, profit margin index and internal earnings rate system. One of the foundations of which is the time value of money.
B. Financial decision making: Time management of money is one of the strategies for financial managers. Through which he is able to make desirable financial decisions for the firm. It is also one of the tools in investment decision making.
C. Evaluating of the firm: Simply put, the value of a firm is the current value of future income from capital. But in reality, the value of the firm refers to the net current value of the firm.
The difference between the current value of earnings from all investments and the current value of investments is the net current value of a firm. In all such valuation processes, time is considered as the price controller.
D. Theory of cash preference: All financial activities are accompanied by risk. As a result, the investor cannot guarantee that the funds invested will be returned on time. In this case, many people do not expect to receive money in the future, but want to be sure of what they get now. This is one of the examples of time in money. Which is called cash preference theory.
E. Measuring risk and uncertainty: Measuring risk and uncertainty: No risk No gain. That is, risk and uncertainty are considered behind each earnings. Decrease in risk and uncertainty – increase increases the rate of expected income also decreases – increases.
In this case, the current value of the expected cash flow also decreases – increases. It is possible to make a decision by measuring such risks and uncertainties by considering the value of money at the time
F. Assurance installment: Installment is a widely used term in financing purchases or loans and leases. Which is determined by the value of money. Or whether the strategy of using the property through purchase or lease with borrowed money is determined by the time value of the money.
G. Determining the present value of money: It is everyone’s wish that any investing person or organization decides to invest in a profitable sector. In order to select such investment projects, the proceeds from the investment are converted to the net current value.
If the net present value of the project is positive then it is decided to invest in the project. This process of valuation is done with the help of time value of money.
H. Evaluation of financing plan: The time value of money strategy is very popular as a supporting force in determining which source or what will be acceptable due to differences in finances, loan repayment period and ancillary conditions for sources of financing.
I. Fund accumulation planning: The amount of a firm to raise funds for the purpose of purchasing or replacing a property in the future, repaying a loan, etc. in a lump sum or in installments. The timing depends on the value concept to determine what to keep.
J. Determining growth rate: Determining growth rate In this case, the growth rate of any other year is determined by the criteria of sales of a base year. Which is one of the applied fields of value concept at the time of money.
From the above discussion in this article, it is evident that the various concepts of financial management, in order to keep the inflows and outflows of money active, discuss the concept of time value of money and its proper use.
Objectives of Time value of money:
Lets see What is the purpose of time value of money?
The objectives of value for money are discussed in terms of project evaluation.
a. To assist in any financial decision-making; Creating logical fields to present a comparative picture of cash flows:
b. Evaluating investment projects;
c. Determining the real value of assets; Assess the actual value of the firm; assist in choosing the time to earn or earn; highlight the actual state of income or earnings for risk reduction or control;
d. To assist in the formation of management and its desirable structure;
e. Determining the probable time of return to the invested funds; Etc.
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