Question

Examine the concept of time value of money in relation to corporate managers. Propose two methods in which time value of money can help corporate managers in general.

Answer 1

I) Time value of money suggests that money recieved at different point of time has different value. Corporate managers must always concentrate on maximising shareholder's wealth. Maximising the shareholder's wealth largely depends on time value of cash flows from investments alternatives.

II) Following 2 methods in time value of money can help corporate managers in general:

a) NPV (Net present value) : It is helpful to decide whether investment is worthy or not. Corporate manager can compare alternative investments o determine their highest NPV.

b) IRR (Internal rate of return) : IRR recognises the time value money and utilises cash flows. This method is clear & transparent. Higher internal rate of return helps manager to decide it's investments alternatives.