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Concepts of the Time Value of Money

Define and discuss the importance of the following time value of money concepts including compounding (future value), discounting (present value) and annuities. Why do organization leaders need to understand these concepts?

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TIME VALUE OF MONEY

Time value of money defined:

The concept of time value of money is based on the principle that a dollar received today is worth more than a dollar received in the future (Keown et al., 2002). As such, one would prefer a $1 received today than a $1 to be received in the future. This could have been caused by a decrease in the value of money because of certain factors such as inflation and other economic factors.

Importance of time value of money concepts

1. Compounding (future value)
This concept on future value will tell us the future amount of a dollar invested or deposited today after earning an interest that is compounded in a certain period of time (e.g. annually, semi-annually, etc.). Compounded interest would mean that in the future, it is not only the principal that earns - it is the principal plus the interest ...

Solution Summary

The concepts of the time value of money is discussed. Why organization leaders need to understand these concepts are determined.

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