Question

How can a corporation best take advantage of the concept of the time value of money?

Answer 1

Answer: Time value of money: Time value of money is based on assumption that present worth of a dollar is more than the future worth of the one dollar due to its earning capacity.

A corporation can take best advantage of above concept in their business. Every corporation have limited amount of fund, so they invest in such project whose will be provide better return from other projects.   If corporation invest the fund in a project, corporation should know the estimated future return from the project. Corporation should compare the project return with cost of capital and required return. If project return is more than cost of capital or required return, project should be accepted other wise it will be rejected.

Therefore, corporation use the concept of time value of money to grading the projects or accepting the projects.