Question

Explain in your own words and example of how a business could use the Time Value of Money concepts we covered this week.

Answer 1

The business can use the Time value of Money concept in this way.

For example: if a business has $10,000 due from one of it;'s customers. The customers presents the company with two options, either to receive $10,000 today or after 6 months.

The company can calculate the FV of money, if invested for 6 months at 6% rate of interest.

$10,000 * (1.06)^0.5

= $10,295.6

So, the company should receive the amount today and earn interest on it for a six months period, rather than accepting an amount of $10,000 after 6 months.

SO, this is how a business can evaluate the options and their attractiveness suing the time value of money.