What is the Time Value Of Money Concept (Part 1 of 3)

July 4th, 2006 Comments off
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What do we mean by Time Value Of Money?

In simple terms, a dollar in hand TODAY is worth more than when you supposed to received say ONE YEAR from today.

Is it important to understand this Time Value Of Money concept?

It is definitely important to understand especially when an entity start investing in projects that involves paying cash outflow up-front and only receiving cash inflows after a certain period of years. Those cash inflows supposed to receive after a few years later are not the same as being received upfront.

By understanding this concept, we can then later on learn to use a certain discount factor to relate these inflows supposed to receive in future years back to the up-front capital outflow.

Time Value Of Money concept generally applied to :

Capital Investment Appraisals

Risk Versus Return Scenario as risk is associated with the time

Concept is used in Insurance and time related products

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Financial Accounting


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