Time Value of Money

Time Value of Money

[Name of the Student]

[Name of the Institution]

In two to three paragraphs , explain why the concept of present value is so important for corporate finance and is often the very first taught in any finance class

Answer

Concept of present value basically means that the money received today is worth more than the same sum received in the future i .e . Money has a time value therefore money that is to be received in the future needs to be discounted at the present value using

the appropriate discount or interest rate . This is an important concept in finance . If a capital investment is to be justified , it needs to earn at least a minimum amount of profit , so the return compensates the investor for both the amount invested and also the length of time before the profits are made .Another reason why the future income needs to be discounted at the present value is the impact of inflation . In most recent years prices have been seen rising as a result of inflation . Therefore funds received today will buy more than the same amount a year later , as prices will have risen in the meantime . The funds are subject to a loss of purchasing power over time Calculation of Future Value

Formula for the calculation of Future Value is

FV PV CH (1 i ) t

Where FV is the future value after t periods

PV is the present or initial value

i is the rate...