. What the time value of money is and why it is so important in the field of finance

. What the time value of money is and why it is so important in the field of financeFinancial Statement Analysis. Financial decisions are made based on future value or present value. Future value is what one or more cash flows are worth at the end of the period while the present value measures the worth of one or more cash flows to be received in the future are worth today. The effective annual interest rate is the annual growth rate that takes into account compounding. These concepts are fully covered in the paper while handing the questions. Financial management ratios are an area of expertise that every manager in any financial position should get acquainted with. They are useful in helping him to make sound financial decisions on the source of funds, the investment option to undertake and the financial prudence needed in the running of a business entity. What the time value of money is and why it is so important in the field of finance: The question that comes to mind is what the value of future cash flow is today. The time value of money is the value of the stream of future cash flows today. Money has a time value since a dollar held today is worth more than a dollar to be received in the future. If you had the money today, you would have probably invested it and earned interest thus time value of money is the opportunity cost of forgoing today’s consumption. The time value of money is important in the field of fiancé because before investment decisions are made there is required that a comparison be made between the value funds invested today and the value of expected future cash inflows. The decision to make the investment should only be arrived at if the amount of future cash inflows exceeds the cost of the investment that is the initial cash outlay. In making financial decisions, which is concerned with the designing of the optimal capital structure and sourcing cheap funds for the business. The time value of money is used when comparing the cost of different sources of finances. The effective rate of interest of each source of funds is calculated based on the time value of money.

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