What is time value of money? Discuss its relevance in financial decision making

Time value of money is a financial concept that refers to the idea that money today is worth more than the same amount of money in the future.

GET PDF of fully solved assignment MCO-07 or any other by click above. You can order any subject ignou solved assignments pdf, ignou handwritten assignments pdf or ignou Handwritten Assignments hard copy from above link.

This is because money today can be invested and earn interest, whereas money in the future is subject to inflation and loses purchasing power over time. Therefore, the time value of money recognizes that a dollar received today is worth more than a dollar received in the future.

The time value of money is relevant in financial decision making because it allows individuals and businesses to make more informed decisions when it comes to investing, borrowing, and saving money. Here are a few examples:

1. Investment decisions: When evaluating potential investment opportunities, the time value of money can be used to calculate the present value of future cash flows. By discounting the expected cash flows to their present value, investors can compare the potential returns of different investments and make informed decisions about which investments to pursue.
2. Borrowing decisions: Borrowing money involves paying interest, which is essentially the cost of borrowing. The time value of money can be used to calculate the present value of the interest payments, which can help borrowers evaluate the true cost of borrowing and compare different loan options.
3. Saving decisions: Saving money involves setting aside funds for the future. The time value of money can help individuals and businesses calculate how much they need to save in order to achieve their financial goals. By accounting for the effects of inflation and the potential returns on investments, individuals and businesses can make more informed decisions about how much to save and where to invest their savings.

In summary, the time value of money is a crucial concept in financial decision making because it allows individuals and businesses to make more informed decisions when it comes to investing, borrowing, and saving money. By accounting for the effects of inflation and the potential returns on investments, individuals and businesses can make more accurate calculations and avoid costly mistakes.