Understanding the Time Value of Money

Time Value of Money (TVM) is the concept where investors prefer the idea of receiving money now than in the future. For example, if you are given the option of choosing to receive $1000 today or $1000 after 2 years, it is better to choose receiving $1000 today because it has more value and utility. The money can be used to re-invest and gain interest. TVM can be broken down to Present value (PV) and Future Value (FV).

Present Vale and Future Value

Present value helps us understand how much the cash that will be received in future is worth today. Future value helps us determine how much the cash received today is worth in future. Both PV and FV can be determined with the help of formulas below.

PV = FV / (1+ r)^ t

FV = PV * (1 + r) ^t

where,

FV = Future value of money

PV = Present value of money

r = interest rate

t = number of years

Conclusion

Just as the phrase “time is money”, the value of the money that we have today will not be the same in future. By understanding the concept of TVM, one could identify the difference between good and bad investments. Analyzing these choices requires a spectrum of tools apart from the basic formula presented above. Whatever is the case, the basic idea is to create the cash flows. If TMV is not utilized properly by a company, it might even lead to financial disasters.

Comments

Two Sides of Corporate Social Responsibility

Corporate Social Responsibility (CSR) -- it is the hottest topic out there. Should we trust that companies live up their values or there are any underlying motives? But, let's first start by exploring the definition of Corporate Social Responsibility (CSR). It is defined as the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life ( World Business Council on Sustainable Development, 2000 ). So, CSR is based on the belief that companies make positive contributions to society. Some examples of CSR activities that organizations participate to be socially responsible are as follows: Philanthropic CSR- Companies donate to the needy via charities. Their donations include clean water programs, helping those affected by natural disaster etc. Environmental CSR- It is very important to limit pollution. Companies participate in CSR by lim...

Tesla's PESTEL Analysis

Political factors Tesla was able to set up its Gigafactory 3 in Shanghai, China. The factory is the first wholly owned foreign auto factory in China. This shift, where China allows a foreign manufacturer to build their facility without partnering with local companies may mean that Tesla can tap the Chinese market without paying high tariffs on US cars (CNBC). However, Tesla might still risk retaliation from Chinese consumers amidst US-China trade war. Economic factors More people are moving towards electric cars to save on the added expenses. All electric cars purchased during or after 2010 are eligible for a federal income tax credit of up to $7,500 ( US department of Energy ). These governmental incentives for electric automobiles could encourage people to buy more electric cars. Also, the US government has incentives for plug-in hybrid cars from $2,500- $7,500 based on battery capacity. These plug-in hybrid cars have high-capacity batteries that can be charged to ...

Managing Older Workforce

I recently listened a "HBR podcast" series on how to manage older people at work .These days, managers need to adapt to different kind of generations seen in workforce and act accordingly. It was mentioned that there are 5 generations in workplace today and methods that work with Gen X/Z may not work with millennials and vice versa. Expectations also change based on times and norms of that era. One of the trends being seen at workplace these days is younger managers with people under them who are much older and experienced and managing these “older” people requires additional care on the part of managers. The podcast talked about three cases pertaining to older generations and how they perceived, areas of age, experience, modern technology tools, etc. and how their views are the source of frustration for their younger counterparts. Managing of the diverse workforce and changing workforce demographics are related to strategic human resources management. Managers ...

Kaivalyam

Search This Blog