Concept of the Time Value of Money concerning Corporate Managers
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Examining the concept of the time value of money concerning corporate managers
The time value of money concept holds that if you have a particular sum of money today in your hand, it is worth more than a similar amount at a future date due to its potential capacity to earn interest at a future date. Due to the ability of that money to gain interest, money is worth more immediately you receive it. Corporate managers prefer having money today instead of the same amount in the future due to its ability to increase in value after earning interest. The time value of money helps to calculate the present value of a stream of cash flow or sum of money. When corporate managers are informed to choose between receiving a given amount of money today or after one year, they prefer today because they can invest it and earn a definite annual return on the investment. The percentage amount of money earned would not have been obtained if there was a late investment. When corporate managers receive money today and spend it without investing, it is still better because the buying power will be more and will not be affected by inflation (Higgins, Koski & Mitton, 2016).
Two methods in which time value of money can help corporate managers in general
The net present value is a method used by corporate managers to determine whether it is worthy to undertake investment or not after understanding if there will be gain or loss. That is done by comparing investments and know the one whose Net Present Value is the highest. Corporate managers get the sum of the present value of all the cash flows that would be available for a project. The project is worth doing if the total is more than zero because the higher the Net Present Value the better.
The internal Rate of Return is another method that shows how much profit will be generated from the money that was invested. The investment that brings the highest Internal Rate of Return is the best to undertake where the method is comprehensible as well as easy to understand. These two methods help corporate managers in capital budgeting (Gallagher & Andrew 1996).