The time value of money is an important concept because it is one of the fundamental concepts used in making investment and other financial decisions. It is the foundation of the concept of present value.Know More
The fundamental premise of the time value of money is that money received earlier is worth more than money received at a later time. Over time, the value of money changes due to outside factors such as inflation and interest. Inflation is an increase in the general level of prices, and, over time, it decreases the value of money. As a result, a given amount of money will purchase a smaller basket of goods in the future. Interest is money paid for the use of money, as in an auto or home loan.
Receiving cash sooner rather than later is preferred for a couple of other reasons. First, individuals generally prefer present consumption to future consumption. To entice a consumer to forgo present consumption in favor of future consumption, he must be offered more future consumption in exchange. The cost of future goods in today's money is known as their present value. Also, money now is worth more than money later because of the risk that future payment might never be received. The reasons for this risk include default and death.Learn more about Financial Calculations
IRR, or internal rate of return, refers to the discount rate that, when used, results in a zero net present value of existing cash flows from an investment or project. It is used in capital budgeting to rank prospective investments or business projects with a higher IRR.Full Answer >
The formula to calculate return on investment is ROI = (gain from investment - cost of investment) / cost of investment. The subsequent result is expressed as a ratio or a percentage.Full Answer >
The annual business revenue is how much money a company generates in a year, whether from sales or interest from investment. Companies must keep up with annual revenue as it is a number used for tax purposes.Full Answer >
To calculate net present value of an investment, divide the guaranteed return by 1 plus the interest rate that a different investment would bring in, and subtract the initial investment from the result. Consider a positive answer a sign that the investment is comparatively sound.Full Answer >