The time value of money can also be referred to as time preference for money.this, then, constitutes the rationale of considering time value of money in financial decision-making. The main reason for time preference for money is to be found in the re-investment opportunities for funds, which are received early. The funds so invested will earn a rate of return which or more popularly as a discount rate. The expected rate of return as also the time value of money will vary from individual to individual depending on his perception, among other things1.
The investment decision relates to the selection of assets in which can be acquired fall into two broad groups (i) long-term assets which will yield a return over a period of time in future, (ii) short-term or current assets defined as those assets which in the normal course of business are convertible into cash usually within a year.accordingly, the asset selection decision of a firm is of two types. The first of these involving the first category of assets is popularly known in the financial literature as capital bugeting.the aspect of financial decision-making with reference to current assets or short-term assets is popularly designed as working capital management 2.
Working capital management is concerned with...
One aspect of the working capital management is the trade-off between profitability and risk (liquidity). There is a conflict between profitability and liquidity. If a firm does not have adequate working capital, i.e. it does not invest sufficient funds in current assets, it may become illiquid and consequently may not have the ability to meet its current obligations and thus invite the risk of bankruptcy. If the current assets are too large, the profitability is adversely affected. The key strategies and considerations in ensuring a trade-off between profitability and liquidity is one major dimension of working capital management. In addition, the neither inadequate nor unnecessary funds are locked up. To summarise, the management of working has two basic ingredients, namely (i) an overview of working capital management as a whole, and (ii) efficient management of the individual current assets such as cash, receivables and inventory 3.
The second major decision involved in financial management is the financing decision. The investment decision is broadly concerned with the asset-mix or the composition of the assets of a firm. The concern of the financing decision is with the financing-mix or capital structure or leverage. The term capital structure refers to the proportion of debt (fixed-interest sources of financing) and equity capital (variable-dividend securities/sources of funds). The financing decision of a firm relates to the choice of the proportion of these sources to finance the investment requirements. There are two aspects of the financing decision. First, the theory of capital structure which shows the theoretical relationship between the employment of debt and the return to the shareholders. The use of debt