Time Value of Money

Time Value of Money:

Learning Objectives:

  1. Explain the concept of time value of money.
  2. Why time value of money concept is important in capital budgeting analysis?

Explanation of of the Concept of Time Value of Money

Investments commonly involve returns that extend over fairly long period of time.

Therefore, in approaching capital budgeting decisions, it is necessary to employ techniques that recognize the time value of money.

“A dollar today is worth more than a dollar a year from now”

The same concept applies in choosing between investment projects. Those projects that promise earlier returns are preferable to those that promise later retunes. The capital budgeting techniques that recognize the above two characteristics of business investments most fully are those that involve discounted cash flow. Two approaches to making capital budgeting decisions use discounted cash flows. One is the net present value methodand other is internal rate of return method.

You may also be interested in other articles from “capital budgeting decisions” chapter:

  1. Capital Budgeting – Definition and Explanation
  2. Typical Capital Budgeting Decisions
  3. Time Value of Money
  4. Screening and Preference Decisions
  5. Present Value and Future Value – Explanation of the Concept
  6. Net Present Value (NPV) Method in Capital Budgeting Decisions
  7. Internal Rate of Return (IRR) Method – Definition and Explanation
  8. Net Present Value (NPV) Method Vs Internal Rate of Return (IRR) Method
  9. Net Present Value (NPV) Method – Comparing the Competing Investment Projects
  10. Least Cost Decisions
  11. Capital Budgeting Decisions With Uncertain Cash Flows
  12. Ranking Investment Projects
  13. Payback Period Method for Capital Budgeting Decisions
  14. Simple rate of Return Method
  15. Post Audit of Investment Projects

  16. Inflation and Capital Budgeting Analysis
  17. Income Taxes in Capital Budgeting Decisions
  18. Review Problem 1: Basic Present Value Computations
  19. Review Problem 2: Comparison of Capital Budgeting Methods
  20. Future Value and Present Value Tables

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