Time Value of Money
Financial managers and investors are always confronted with the opportunities to earn positive rates of return on their funds. And we always know that in every single investment opportunity their are always number of cash flows (inflows or outflows). And these cash flows are either same or vary from time to time. We also know that every time there is the uncertainty in the outcomes of returns and inflation is increasing day by day. And it greatly affect the value of money. So, the sensitive financial managers and investors keep close eye on it.
In time value of money we use two inverse concepts:
1. Future Value
2. Present Value
Future value simply means that what will the future value of the present investment opportunity. For example, we keep $1000 in treasury and we forget. After some months when we find it and evaluate its worth we say that this is $1000. But actually when we use time value concept its worth has been decreased because if we had invested that $1000 in any investment opportunity we got some return and obviously, it will be greater than $1000.
Present value simply means that what is the present value of the future cash flow from an investment opportunity. We generally find the present value of the future cash flow. Because, we know that dollar today is worth more than dollar tomorrow. The logical matter behind the present value is same as behind the future value.
Above mentioned both techniques are used in capital budgeting decisions. In which we evaluate different investment opportunities and made decisions on the basis of present and future values. But one thing should be clear that both present and future value concepts are used in Discounted Cash Flow (DCF) techniques.
Financial managers and investors are always confronted with the opportunities to earn positive rates of return on their funds. And we always know that in every single investment opportunity their are always number of cash flows (inflows or outflows). And these cash flows are either same or vary from time to time. We also know that every time there is the uncertainty in the outcomes of returns and inflation is increasing day by day. And it greatly affect the value of money. So, the sensitive financial managers and investors keep close eye on it.
In time value of money we use two inverse concepts:
1. Future Value
2. Present Value
Future value simply means that what will the future value of the present investment opportunity. For example, we keep $1000 in treasury and we forget. After some months when we find it and evaluate its worth we say that this is $1000. But actually when we use time value concept its worth has been decreased because if we had invested that $1000 in any investment opportunity we got some return and obviously, it will be greater than $1000.
Present value simply means that what is the present value of the future cash flow from an investment opportunity. We generally find the present value of the future cash flow. Because, we know that dollar today is worth more than dollar tomorrow. The logical matter behind the present value is same as behind the future value.
Above mentioned both techniques are used in capital budgeting decisions. In which we evaluate different investment opportunities and made decisions on the basis of present and future values. But one thing should be clear that both present and future value concepts are used in Discounted Cash Flow (DCF) techniques.
No comments:
Post a Comment