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Introduction of time_value_of_money

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Time Value of Money 1
Time Value of Money
Managerial Finance II/FIN476
October 21, 2007

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Time Value of Money 2
Time Value of Money
The Time Value of Money (TVM) serves as a foundation for all other notions
in finance. It influences business finance, consumer finance and government
finance. Time Value of Money (TVM) results from the concept of interest. Time
Value of Money (TVM) is an important concept within the financial management.
It compares investment alternatives and then to solve problems, which involving
loans, mortgages, leases, savings, and annuities. “In determining the future
value, we measure the value of an amount that is allowed to grow at a given
interest rate over a period of time” (Block & Hirt 2005). “Why would any rational
person defer payment into the future when he or she could have the same
amount of money now? For most of us, taking the money in the present is just
plain instinctual. So at the most basic level, the time value of money
demonstrates that, all things being equal, it is better to have money now rather
than later” (Croome 2003).
The concept of Time Value of Money (TVM) is that the dollar that company
has today is worth more than the promise or expectation that the company will
receive a dollar in the future. Money, which a company holds today, is worth
more because the company can then invest it and earn interest. Therefore, a
company should receive some compensation for foregoing spending. For
instance, a company can invest their dollar for one year at a 6% annual interest
rate and accumulate $1.06 at the end of the year. Therefore, one can say that
the future value of this dollar is $1.06 given a 6% interest rate and a one-year

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Time Value of Money 1 Time Value of Money Managerial Finance II/FIN476 October 21, 2007 Time Value of Money 2 Time Value of Money The Time Value of Money (TVM) serves as a foundation for all other notions in finance. It influences business finance, consumer finance and government finance. Time Value of Money (TVM) results from the concept of interest. Time Value of Money (TVM) is an important concept within the financial management. It compares investment alternatives and then to solve problems, which involving loans, mortgages, leases, savings, and annuities. “In determining the future value, we measure the value of an amount that is allowed to grow at a given interest rate over a period of time” (Block & Hirt 2005). “Why would any rational person defer payment into the future when he or she could have the same amount of money now? For most of us, taking the money in the present is just plain instinctual. So at the most basic level, the time value of money demonstrates that, all things being equal, it is better to have money now rather than later” (Croome 2003). The concept of Time Value of Money (TVM) is that the dollar that company has today is worth more than the promise or expectation that the company will receive a dollar in the future. Money, which a company holds today, is worth more because the company can then invest it and earn interest. Therefore, a company should receive some compensation for foregoing spending. For instance, a company can invest t ...
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