You must have Credits on your Balance to download this sample

# Utilizing the Time Value of Money

High school

Essay

Miscellaneous

Pages 2 (502 words)

Download 0

Investments are known as risky placement of money in financial institutions of some kind for the purpose of attaining a regular profit and a higher value of the investment when it is retrieved. Investment can be informs of buying stocks, assets, or some form of equity.

…

Get more done in less time

Let us write a custom essay on your topic

“Utilizing the Time Value of Money” with a personal 15% discount.

Order now
## Introduction

But do to some limitations of these tools other tools such as Profitability Index and Payback Period. The payback period determines the duration of the time it would take to recover the investment made initially. This will give us the number of periods it would take to breakeven for the initial investment made. The profitability index is used as well in investment decisions because it measures the value created per dollar invested. So if the PI shows a greater than 1 value, then it means that the investment is returning a greater amount than invested. These two techniques are used because they resolve the disadvantages of NPV and IRR methods. (Helmkamp, 1990)

The first disadvantage of a NPV calculation is its dependency on the interest/discount rates. It is very difficult for the investor to know the correct discount rate since they can change though out the life of that investment making considerable differences on the decision. (Investopedia, 2008)

Another issue with the discount rate is the differences in the risk factor of the investment. Since the risk can change, therefore the discount rate, this can make lives very hard in calculating NPV. (Investopedia, 2008)

Another disadvantage lies in the facts that NPVs are just mathematics calculations that do not take into account the real options available for investment. ...

Download paper
Not exactly what you need?

### Related papers

The Time Value of Money
However, this is not the case with the $10000 received 3 years from now. Its value will be $10000 only since no interest will be earned as illustrated in the figure below:…

Time Value of Money
Therefore, to make a certain investment, the opportunity costs should be low (David, 1984).…

The Value of Money
Compound interest is different from the simple interest on the grounds that it takes into account the accumulated interest that has to be paid over the years and the principle for compound interest assumes that interest should also be paid on the accumulated interest. Compounding can be done annually, semi-annually or quarterly depending upon the circumstances.…

Net Present Value and Internal Rate of Return
Table 1 shows the cash inflow expected to be generated and the cash outflow expected to be incurred should the proposed expansion be undertaken. During the first year, the company will incur expenses to finance the purchase of the new plant and equipment costing 5,000,000. It is assumed that this amount will be a one time expense fully incurred during the first year.…

Utilizing the Time Value of Money
But do to some limitations of these tools other tools such as Profitability Index and Payback Period. The payback period determines the duration of the time it would take to recover the investment made initially. This will give us the number of periods it would take to breakeven for the initial investment made. The profitability index is used as well in investment decisions because it measures the…