discussion

What advice could you give on Time value of money mentioned below? What would you do different to help improve an organization on money?

Living in America it would be nearly impossible to go any length of time without hearing the adage ‘time is money’. When uttered, the individual is likely meaning the amount of time being spent on a task or process is costing them money. When thought of in the financial sector this phrase takes on a new meaning. Time can actual help money grow and increase in value.  This concept is referred to as the time value of money (TVM).  TVM can be summed up as the value of the money today, or present value (PV) versus the value of the money in the future, or future value (FV) (Ted-Ed, 2014).  This concept and its appropriate application are critical to the success of a business.

Financial managers will use the TVM to help the business grow and be more profitable. They can determine the value of cash flows today that the business expects in the future. The Manager must utilize calculations to find the PV of the future cash flows. They would be reducing or discounting the value of the expected cash flow to understand its value in the present. The information needed for these PV calculations is typically the same as one would use to find the FV.  The most notable difference is instead of multiplying by a yield, the equation calls for division by the discount rate (Khan Academy, 2019).

The TVM is an important financial principle. It has a significant impact on the investment decisions the business makes. The overarching goals of many for profit companies is to increase the value of their organizations. This could be accomplished in any number of ways, i.e. through product sales, acquisitions and investments. Deciding which venture to take or where to put the most effort is easy when the FV or PV of each option has been calculated. Most investments are analyzed using the discounted cash flow approach (Ross et al., 2020). If the organization knows that one investment will payout less money in the future than another, or that one future payment is valued less than the money today that investment will not be made as it is contrary to the overall goal.