Question

"Time Value of Money "

The time value of money is a critical concept to understand in accounting, especially when dealing with loans, investment analysis, and capital budgeting decisions. The time value of money concept can be used to decide which projects to start and what investments to make. You can also utilize the time value of money concept in your personal life.

• Provide two (2) decisions you may need to make that could involve the time value of money. Explain the how the importance of the time value of money will factor into your decision-making process.

Answer 1

Time value of money is a very important concept. It basically says that money today will be of different worth tomorrow.

Two decisions where time value would be used are:

1. While making investment in any stock or any other security, the future value receivable should be discounted to the present value to decide whether it is worth making that investment. If the discounted value is equal to or more than the money to be invested today, it is worth to make the investment.

2. While making a sale, and offering cash discount for making immediate payment or paying and availing cash discount in case of purchase, the time value of meny is to be considered in deciding what rate of discount to be offered or if it's worthwhile to accept the discount and pay now. If you can earn more than the discount offered on money, then it is better not to accept the discount.