- Examine the concept of the time value of money in relation to corporate managers. Propose two methods in which time value of money can help corporate managers in general.
When we talk about the time value of money, there are several sayings. For example:
- Time is money
- A nearby penny is worth a distant dollar
- A dollar today is worth more than a dollar tomorrow
- A Penny SAVED IS A PENNY EARNED
- You give a poor man a fish and you feed him for a day. You teach him to fish, and you give him an occupation that will feed him for a lifetime
- Don’t be penny wise and pound foolish
- Don’t work to want, work to live!
- Waste Not Want Not!
- Do what today others won’t, so tomorrow, you can do what others can’t.
- Doing the best at this moment puts you in the best place for the next moment.
And of course, the one that your parents used the most!
- Money doesn’t grow on trees
What are some other saying that you have heard? Time value of money deals with present value, future value, and what other values? As a manger, one must be able to look at the present and know how to get what is desired in the future. In essence how do you turn investments into profits? Managers must look at acceptance criteria. Meaning what are investors willing to accept as a return and in how many years or months. This goes into weighted average cost of capital (WACC). This will be discussed later in the course. But for now, what other factors must managers look at when evaluating future value and present value? A better question is why must managers deal with issues as they arise instead of procrastinating until further notice? A saying that goes with this:
“A stitch in time saves nine” This means it’s better to deal with something now than to allow it to fester or wait and let it get worse and cause more time and ultimately money.
The one thing that affects the time value of money the most is inflation. Why is that? Here is an article on inflation and TVM.
The time value of money is used in just about everything in today’s society. It influences decision-making in almost every area of financing.
Corporate managers can use time value of money (TVM) to evaluate if a project will be profitable. One of the methods that can be used is the Net Present value. This is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV analyzes the profitability of the project.
Another method that can be used by corporate managers is profitability index. This method compares projects return to its prospective risk. (1)