Concept Of Time Value Of Money

The concept of tome value of money suggests that the money received at different point of time has different value. The financial manager must appreciate this fact and understand why they are different and how they are made comparable.Time value of money is a concept to understand the value of cash flows occurred at different point of time. For example, if we deposited $ 100 in saving account at 5% annual rate of interest, it will increase to $ 105 at the end of one year. The concept of time value of money is useful in addressing our real life problems relating to planning for future family expenditure. For instance, if we need $ 50,000 after the retirement from job in 15 years, the amount we need to deposit at interest every year from now until the retirement is conveniently determined by using the time value of money concept. Many financial decisions of the firm require a consideration regarding time value of money. In this regard, time value of money concept deserves serious considerations on all financial decisions.

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