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Saturday, 31 March 2018

What do you mean by time value of money?

Money has time value, as a rupee today IS more valuable than a year hence. It Is on this concept‘ ‘the time value of money” is based The recognition of the time value of money and risk is extremely very important in lmancial decision making and other asset criteria. Sound decision-making requires that the cash flows' which a firm is expected to give up over period should be logically comparable. Cash flows become logically comparable when they are appropriately adjusted for their differences in timing and risk.

The welfare of owners would be maximised when Net Present Value is created from making a financial decision that’s why time value concept which is important for financial decisions. It recognizes that the value of money is different at different points of time.

Since money can be put to productive use, its value is different depending upon when it is received or paid. The value of a certain amount of money today is more valuable than its value tomorrow. It is not because of the insecurity involved with time but purely on account of timing.

The difference in the value of money today and tomorrow is referred as time value of money.

Thus, we can say that time value of money is central to the concept of finance.

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