Financial Decision Making

Time value of money

This is the preference that can be seen in individual such that they prefer cash inflow now rather than in the future . This concept acknowledges the fact that any currency losses value with time and as such if it is to be compared with a amount to be received in Nth year then the two must be at the same time value . This means that an investor 's analytical power is increased by his /her ability to compare cash inflows and outflows separated from each other by time . He

/she should be able to work in the reverse direction i .e . from future cash flows to their present values

Any company will invest finance for the sake of deriving a return which is useful for four main reasons

1 . To reward the shareholders or owners of the business for staking their money and by foregoing their current purchasing power for the sake of current and future return

2 . To reward creditors by paying them regular return in form of interest and repayment of their principal as and when it falls due

3 . To be able to retain part of their earnings for plough a back purpose . This facilitates not only the company 's growth at present and in the future but also has the implication of increasing the size of the company in sales and in assets

4 . For the increase in share prices and thus the credibility of the company and its ability to raise...