You are on assignment from the finance department to develop another workbook for the next weekly staff meeting that explains to the team why the time value of money is important in an economic decision; but keep it to the basics, ticking to the two most common tools used in business to incorporate the time value of money into operational decision making: NPV and payback period. Use those models in your workbook, making sure you briefly discuss each of them.
Time value of money is important in economic decision making. The method allows the valuation of a likely stream of earnings in the future. Usually the earnings are discounted and added together, giving a lump sum value of the entire income stream. In economic decisions time value of money is important because there is an opportunity to earn interest on money and because inflation will drive prices up. The economic decision is based on the fact that if money can earn interest, any amount of money is worth more the sooner it is received. The fact that money is available now is worth greater than the same amount in future because of its potential to earn. In economic decision making time value of money is important because if money is deposited in a time deposit account or a savings account it has the potential of earning interest. Another reason why time value of money is important is that in future inflation is likely to drive up prices. Supposing a person has $200 today and invests it in term deposit account for one year earning 6% interest. It will be equal to $212 after one year. From this point of view, $200 given now or $212 given one year from present have the ...
This solution explains stream of money in future. The sources used are also included in the solution.