Time value of money - Research Paper Example

gger amount in the days to come. The renowned fact that money possesses a time value implies that time value of that money must be put into account when making decisions to do with finance.  This is done by restating values of money through time with what is called Calculations of Time Value of Money.  These calculations are applied so as to shift monetary unit values of through the given time period.  The calculations can be used to state future monetary flows in present value terms and also to restate today’s value amounts into future monetary values.

These calculations are by far the most powerful tool that is available for making business and financial decisions. These values may be used to restate cash flows in such a way as to make them comparable in the process of making financial decisions. The present value of money puts into account that fact that cash always loses value over time due to inflation as well as opportunity cost. The reason the topic of present value of money is very important in finance is because its calculation forms a basis for all decisions that managers make.

Calculation of present values is very important in making many financial decisions that face all individuals and managers in various types of firms.  This procedure allows many financial computations in relation to the interest earning, returns upon investments gains, capital budgeting processes of decision, predicaments relating loan, insurance programming predicaments, and many other business asset buying or decisions in relation investment.  These computations also grant the basis for part of the most commonly used valuation models as well as concepts applied in today’s finance.

 Failure to discount makes ventures that yield returns in the future appear to be more valuable than they really are.(Rosen, H.S 2005 pp. 241)Through calculating the net present value, firms are able to make accurate estimates on the returns to expect from various investments they choose to undertake. This is through calculating returns on investments. Firms are also in a better position to make reasonable and accurate budgets since they are under no illusion about their actual present or future monetary value.

The net present value is also very important in dealing with loans related issues that may arise. The finance manager of a company will be in a position to know the amount of loan that the firm can afford to repay comfortably. This is very important because the company will avoid having too large loans which may be difficult to repay and thus it will remain financially stable. Finally, calculation of net present value is very useful in solving insurance programming problems of a company. Question 2 Future Value(FV) = Present Value(PV) ?

( 1 + Interest Rate(R) )T , where T is the number of periods or years a) Present value = $ 15,000, Interest Rate = 7%, Time = 5years Therefore,Future Value = 15,000 ? (1 + 0.07)5 = $21,038.28 b) Present value = $ 19,500,Interest Rate = 4%,time = 3years Future Value = 19,500?(1+0.04)3 = $ 21,934.8 c) Present value = $