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Finance & Accounting
Pages 5 (1255 words)
Overview Although time value of money is not something that we normally think about, it is a concept that is used in our everyday lives, from banking and business, to investing and saving. The concept of interest lies at the root of the time value of money.
The principles of time value of money and learning its techniques are the most important concepts for the study and application of finance in general. The concept of interest is divided between simple and compound interest. Simple interest is calculated only by taking into consideration the beginning principal. For instance, if an individual invested $1,000 dollars in a savings account at 5% annual interest, the expected return after one year would amount to a $50 gain on investment. The concept of compound interest unlike simple interest which only takes into consideration the interest return of the initial principal investment is determined by taking into consideration not only total interest on the principal, but it also includes any interest gained on the initial investment. In simple terms, compound interest calculations encompass interest on interest. It is of paramount importance for a finance manager to understand and have a through understanding of time value of money concepts and its impact on the value of an asset at a specific point of time in order to be successful. Present and Future Value of an Investment For a company one of the most important tools in determination in the time value of money analysis for a specific asset is the cash flows time line. ...
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