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Corporate Finances: Time Value of Money and Sinking Funds

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Examine the concept of time value of money in relation to corporate managers. Propose two (2) methods in which time value of money can help corporate managers in general.
•Examine the pros and cons of a sinking fund from the viewpoint of both a firm and its bondholders. Determine the fundamental manner in which this knowledge could be helpful to a financial manager.

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Solution Summary

This solution discusses how knowing about time value of money concepts helps a corporate manager and how knowing about a sinking fund helps a financial manager.

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A corporate manager's job is to maximize the wealth of their employer's shareholders. They do this in part by maximizing the company's return on all of its assets, including its cash. The time value of money concept recognizes that a dollar received today is worth more than a dollar received in the future because the dollar received today can be invested to earn returns (such as interest) over time (Time Value of Money - TVM, n.d.). Each corporate manager must evaluate potential investments in order for the company to earn the greatest return on its cash invested. Two such techniques are internal rate of return and net present value. The internal rate of return is the discount rate that which the present values of a project's cash flows equals its initial investment (Internal Rate Of Return - IRR, n.d.). The corporate manager compares the project's internal rate of ...

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