ABSTRACT : Time Value of Money

ABBISHEK R

BC0140003

The time value of money is an important concept to investors because a dollar on hand today is
worth more than a dollar promised in the future, the dollar on hand today can be used to invest
and earn interest or capital gains. A dollar promised in the future is actually worth less than a
dollar today because of inflation. The idea that money available at the present time is worth
more than the same amount in the future due to its potential earning capacity is called the time
value of money. The recognition of the time value of money and risk is extremely vital in
decision making. The greater the inflation , the greater the difference in value between the
currency today and tomorrow. It is one of the fundamental concepts used in making investments
and other financial decisions.

Most financial decisions such as the purchase of assets or procurement of funds, affect the firms
cash flows in different time periods. For example, if a fixed asset is purchased, it will require an
immediate cash outlay and will generate cash flows during many future periods. Similarly if the
firm borrows funds from a bank or from any other source, it receives cash and commits an
obligation to pay interest and repay principal in future periods. The economic factor which affect
the value of this volatile asset. For example , when there is monetary inflation , the value of
currency decreases over time. The firms cash balance will increase at the time shares are issued,
but as the firm pays dividends in future, the outflow of cash will occur and also sound decision-
making requires that the cash flows which a firm is expected to give up over period should be
logically comparable. The reasons for time value of money are risk and uncertainity, inflation,
consumption and investment opportunities

Thus, we conclude that time value of money is a concept integral to all parts of business. It
recognizes that the value of money is different at different points of time. Since a business does
not want to know just what an investment is worth today it wants to know the total value of the
investment. The research will be about comparing 5 selected companies and time value of money
will deal with the various methods in which the Time value of the money would be calculated
with emphasis to Simple Interest Method and Compound interest method relating to present and
future annuity values.