There are so many business students looking for time value of money assignment help. A dollar in hand today is worth more than a dollar received in future. One has a higher purchasing power with a dollar today than in future. A dollar to be earned in future is subject to many risks as compared to a dollar in hand today. These are the basic founding ideas behind the time value of money. Time value of money recognizes the concept that the value of money is different at different time periods. Since money is invested in different projects, its value is different depending on the time it is paid and received.
Time value of money is an essential concept for students majoring financial management. We offer dedicated and high quality time value of money assignment help. Our team of highly qualified experts are well equipped with diversified skills and deeper understanding when it comes to time value of money assignment help. We will therefore come in handy when you will be seeking managerial finance homework help.
Rationale behind the time value for money
Risk and uncertainty
The business environment is subject to risk and uncertainty. It is difficult for an investor to predict correctly the cash flows at a future date. Cash outflow is within the control of the organization but largely depends on the cash inflows. Uncertainty in the cash inflows makes it preferable to receive money today rather than in future.
Inflation is the general rise in price of goods and services in an economy such that the purchasing power is reduced. This inflation devalues the currency. In an economy affected by inflation, money has a higher buying power today than that received in the future.
Human needs and wants are urgent and recurrent. One derives a satisfaction by fulfilling a need or want today than in future. Thus individuals prefer receiving money today to fulfill a need rather than in future.
In order to receive profits in future, investors prefer making an investment today. An investment made now will stand a higher chance of generating more future benefits than an investment made in a future date. Better investment opportunities could also be available currently as compared to the future.
- Interest rate- the expense incurred on the use of money. It is expressed as a percentage.
- Principal- amount of money required to invest in a project.
- Maturity- it is the final value to be realized at the end of a project or an investment.
- Time- period before maturity of the investment.
- Time line- a graphic representation used to indicate cash flows occurring at given time intervals.
Techniques of time value of money
According to The Motley Fool website, there are three main techniques that can be employed in solving problems related to time value of money. They include the present value calculations, future value calculations, as well as recurring value techniques. Time value for money can better be understood by taking a deep analysis of the two main techniques used to value money.
Compounding technique (future value technique)
This is a technique used to find a future equivalent of an investment made today. This amount is arrived at by earning of interest on the principal amount and reinvesting back the entire amount. This means that the total maturity value of a preceding period forms the principal amount for the following period. The process of compounding continues indefinitely but can be withdrawn depending on the wish of the investor.
Future value can be computed using the following formula
FV = PV * [(1 + r)T]
- FVn is the future value of the initial investment
- PV is the initial invested amount
- r is the annual rate of interest.
- T is the time period in years.
Discounting technique (present value technique)
Discounting is the opposite of compounding technique; it represents the current equivalence or worth of a future cash inflow or cash outflow. This means that the future cash flows are discounted to give their present value. The present value is usually lower than the future value due to opportunity cost of the investment.
Present value can be computed as indicated below
Present value = FV / (1 + r)n
Application of time value of money concept
This concept is practically applicable and is used by investors in determining the likely profitability of an investment in future. This is done by comparing the future value of money with its present value using the above discussed techniques. The investor then determines if it is worth undertaking the risk. This concept is also combined with other techniques like net present value, internal rate and modified internal rate of return when making comparison between two or more investment opportunities.
Time value of money assignment help
Time value of money concept forms the basis of many financial decisions. Examination questions and homework are very common testing this area. Our main aim is to ensure that you have easy time understanding concepts and solving time value of money assignment help.