Value of money is invariably linked to time when money is received at a given point of time. A unit of money received or in possession today is of greater value than a unit of money received tomorrow or at a point or time in future. If a businessman invests Rs. 100 today, he expects to get somewhat more than Rs. 100 later on. If he expects to get Rs. 100 at the end of one year, the businessman will be willing to spend somewhat less than Rs. 100 today. The expectation of Rs. 100 after one year, therefore, has a "present value" of somewhat less than Rs. 100. How much less depends on how much he expects to earn on the money, the businessman invests.
Time value of money concept is extremely important, while backbreaking upon investment proposals which may be of any of the following kinds or combination of them :
- new and enlarged production facilities,
- new and enlarged non-production facilities, and
- making good old and obsolete items of capital nature.
In any proposal for expenditure, litheness have to be related to the time/period during which the same are received to cover up not only the costs but also something more slim that; but benefits and costs would not be relevant if they occur far in future. This is precisely so because forecasts in determining time value of money Bentley a certain period are unreliable.
In assessing time value of money, the central theme is to consider the present value of the benefits to be derived in future, Although more the benefits to be derived, the better it is and higher present value of the investment will indicate this, but the early benefit of investment from smaller investments would be preferable as assumptions of a distant future may go wrong.
There are following major methods by which time value of money concepts can be illustrated :
- Pay Back Period Method,
- Time adjusted rate of return by (i) Net Present Value (NPV) Method, and (ii) Discounted Cashflow method known as Internal Rate of Runlet (IRR).
No comments:
Post a Comment