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How would you explain the use of time value of money

How would you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How can you use TVM to create your own, or someone else's, retirement plan?

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Time preference for money is an individual's preference for possession of a given amount of money now, rather than the same amount at some future time.

Three reasons may be attributed to the individual's time preference for money:
- Risk
- Preference for consumption
- Investment opportunities

What considerations are made when calculating TVM?
Two most common methods of adjusting cash flows for time value of money:
Compounding: the process of calculating future values of cash flows and
Discounting: the process of calculating present values of cash flows.

How would you explain the use of TVM in business?
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

Simple interest is interest on the principle amount while compound interest is when your principle and any earned interest earned interest. The interest rate is applied to the original principle and any accumulated ...

Solution Summary

This response explains the concept of time value of money in business and the way to calculate it.

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