Thetime value of money (TVM) is the conception that money that isavailable today will be more in value, in the future, because of thecapacity of money to earn interest. From the idea, it is possible toargue that resources invested today will increase in value over agiven period. In business, the concept has been widely applied inmaking critical business decisions. Also, the concept is utilizedwhen an individual is presented with a dilemma in life involving thepresent and the future value. The idea is important because it helpsinvestors in making better investment decisions when they areconfronted with different options. As an investor becomes presentedwith varied investment opportunities, he/she is in a position toselect an investment that will earn him/her the greatest interest inthe future period. The investment decision is usually reached bycalculating the returns of each and then comparing them. An example,where quantitative decisions may use the concept of the time value ofmoney, is an investment in real estate. In this case, an investor isrequired to calculate the returns of every investment in order toestablish the one that has the highest earnings. Given the rates ofreturn for various investments, it is feasible to establish theinvestment where one would derive maximum benefits in the future.
Ican use the time value of money concept as a quantitative reasoningtool in business, where I can utilize the idea in determining theinvestment decision to select where there are several options toinvest in. In such a scenario, I would calculate the returns fromdifferent business options and choose the one that would provide thehighest returns. I can also apply the conception of the time value ofmoney in my personal life when I need to choose the direction thatwould offer me with the highest benefits in life based on the future.For example, in personal life, I may be confronted with analternative between selecting a job at present and going back tocollege for higher education. In making the decision, I wouldconsider using the time value of money concept in establishing theoption that would be best for me. In this case, I would considerselecting the option that would provide higher returns in the futureor the option that would provide more benefits in life.
Giventhat PV = FV*(1/ ((1+i) ^n))
Thepresent value of $100 received in the future, where r is 10% and thenumber of periods is 5 years, will be as follows
PV= 100 * (1/ ((1+0.1) ^5)
(1+ 0.1)^5 = (1.1) ^5
PV= 100 * 0.6209
Inthe formula FV = PV*((1+i) ^n), n is an exponential andmathematically, it means that the value (1 + i) need to be raised tothe power of n. Let the selected interest rate, r be equal to 10, andthe number of periods, n be equal to 5 therefore, in case one dollarwas invested today, the future value would be as follows
FV= 1* ((1 + 0.1) ^5)
=1* (1.1) ^5
Therefore,the future value of $1 invested for 5 years at the rate of 10% wouldbe $1.61051.
Flood,J. M. (2015). WileyGAAP 2015: Interpretation and Application of Generally AcceptedAccounting Principles.Chichester, U.K: Wiley.