Introduction
The value of money is very fluid; it is different every day – the value of time is very relevant to the value of money. The definition of time value of money states that “a dollar now is worth more than a dollar in the future, even after adjusting for inflation, because a dollar now can earn interest or other appreciation until the time the dollar in the future would be received” (InvestorWords, 2008). This means that a dollar today should be worth more in the future because of the ability to invest that dollar and earn interest on it.
There are several reasons that the time value of money is important for businesses. One is obviously their ability to invest the funds and earn interest. Another reason is making contract and other expenditure decisions; such as the use of installment payments. The consideration of issuing long-term and short-term debt is yet another reason the time value of money is an important aspect to consider.
Time Value of Money
Many decisions made by individuals and corporations are affected by the time value of money. A salary of $50,000 today may be worth $250,000 in 20 years. At the same time, the cost of living will rise causing that merit increase to become a necessity. Investment opportunities must take inflation into consideration as well. Although interest may be compounding on an investment, inflation is also rising. Whichever percentage is higher will determine the value of the investment. “The long-term markets are called capital markets and consist of securities having maturities greater than one year” (Block and Hirt, 2005). Financial applications of the time value of money will be expressed through capital markets. The most common capital market secur ...