Concepts Of Time Value Of Money Essay example
The concept of time value of money lies in the argument that a dollar today is worth more than a dollar in the future. This is mainly because money loses value over time due to many different factors. One of the factors that affect the value of money is inflation. Interest rate is another factor that affects the value of money. Fisher (2006) argues that inflation has an effect on the value of money because it reduces the buying power of money.
Concepts about time value of money tries to put into consideration the financial decisions by enabling financial analysts to convert the different cash flows from the different time periods into present or future values.
Present value concept
Present value is one of the concepts of time value of money that enables us to determine the amount that we need to invest today so that we can have a certain amount in the future at a given interest rate. An example of present value is when I want to have 70,000 after 7 years, how much do I need to deposit today in a bank if it is going to earn an interest rate of 10% per annum?
This concept of time value of money is usually used by accountants to account for the time value of money in many other financial applications. The calculations of present value of money enables the accountants to tell such things as how much they are going to invest or how they are going to estimate the rate of return on investments that they are considering to undertake.