Time value of money

Every business either small scale or large scale has requirement of finance to run its business successfully. Finance is blood of every business. It is necessary for financial manager to take relevant decision regarding finance. In financial decision include
Finance decision: this decision help financial manager to make decision , how to raise finance from different sources , there are various source where a financial manager raise finance. It may be equity share capital, debenture, preference share capital.

Investment decision: After raising finance from different sources, it is necessary to utilizing those funds. While making investment decision various factor is to be considered, it included Time value of money, pay back period, profit, rate of return etc.

Dividend decision: In this decision, financial manager make decision how much part of profit distributed and how much part of profit should keep as reserve in business for future development purpose.

Time value of money:
Time value of money means that amount which is invested today has not same value in future. It may be increased or decreased. It depends upon nature of goods in which investment is made and risk involved in that investment. For example: assuming a 5% interest rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from now is only worth $95.24 today ($100 divided by 1.05), assuming a 5% interest rate.
Time value of money is important factor while making investment decision .There are various reason for this:
Risk premium: Greater the risk associated with future cash flows of an investment , higher risk means more profit .
Rate of inflation: Higher the rate of inflation with down the value of money as well as purchasing power of people.
Wealth maximization: Every organization wants to maximize its wealth. For wealth maximization there is need to consider time value of money.
Future uncertainty: Future is uncertain . every investor can’t stop future uncertainity but reduce it by calculating the future value of investment through time value of money.
Cash flow: To identify cash inflow and outflow there is need to calculate time value of money

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