Mention the Importance of Time Value of Money
Posted by Ripon Abu Hasnat on Thursday, November 26, 2015 | 0 comments
In business inflow and outflow is related almost with every decision. For the purpose of taking right decision, present value and future Value of inflow and outflow are needed to be calculated on term basis. So, considering the importance of the “Time Value of Money” it can be said that –
(a) Opportunity Cost:
(a) Opportunity Cost:
If money is invested in any project then opportunity of investment in other project has to be missed. In finance, it is called “Opportunity Cost.”
This opportunity cost can be calculated by the application of equations of “Time Value of Money”. As an example: In your locality land value becomes double in 10 years. On the contrary, let assume, interest rate is 8% in sonali bank Saving Account. If land is purchased then money cannot be deposited in the Bank. So, in that case, opportunity cost of land purchase is 8%.
(b) Project Evaluation:
To evaluate the long term project, comparison has to make between the present cost of project and expected income or inflow of money from investment. From this chapter we have known that, present value of money and future value of money is not same. So without returning back expected income of the project into a present value, we cannot take long term decision.
(c) Lending decision:
Before taking loan from Bank or Financial Institution installment ability should measure at first. On the basis of the loan repayment schedule amount of installment differs. As an example, Loan Installment of 5 years Term loan and 8 years term loan will not be same. Again term may be yearly, monthly etc. In this situation installment amount will be different too. We can find out term of different installment of different amount of loan and by this we can take decision that, how long of the term of the loan, which way of installment repayment, receiving of how much loan will be suitable for business. Due to the lack of this planning most of the company is declared bankrupt. It should be remember that, loan repayment is obligation for any business and failure of this causes bankruptcy.
(b) Project Evaluation:
To evaluate the long term project, comparison has to make between the present cost of project and expected income or inflow of money from investment. From this chapter we have known that, present value of money and future value of money is not same. So without returning back expected income of the project into a present value, we cannot take long term decision.
(c) Lending decision:
Before taking loan from Bank or Financial Institution installment ability should measure at first. On the basis of the loan repayment schedule amount of installment differs. As an example, Loan Installment of 5 years Term loan and 8 years term loan will not be same. Again term may be yearly, monthly etc. In this situation installment amount will be different too. We can find out term of different installment of different amount of loan and by this we can take decision that, how long of the term of the loan, which way of installment repayment, receiving of how much loan will be suitable for business. Due to the lack of this planning most of the company is declared bankrupt. It should be remember that, loan repayment is obligation for any business and failure of this causes bankruptcy.
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