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MBA 524 MBA524 MBA/524 Week 4 Assignment The Time Value of Money CH.docx

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MBA 524 MBA524 MBA/524 Week 4 Assignment The Time Value of Money CH.docx

Week 4 Assignment – The Time Value of Money Professor Michael Miceli November 22, 2020
1.Why do we care about the time value of money?The time value of money (TVM) is an important financial concept.
It would be preferable to receive money today as opposed to receiving the same amount in the future. This is attributed to the potential earning capacity of an investment. Money that can earn interest is worth more the sooner it is received.

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MBA 524 MBA524 MBA/524 Week 4 Assignment The Time Value of Money CH.docx

Week 4 Assignment – The Time Value of Money Professor Michael Miceli November 22, 2020
1.Why do we care about the time value of money?The time value of money (TVM) is an important financial concept.
It would be preferable to receive money today as opposed to receiving the same amount in the future. This is attributed to the potential earning capacity of an investment. Money that can earn interest is worth more the sooner it is received.
Another relatable concept is that money deposited in a savings account will earn interest: the percentage of a dollar amount which accrued for its use over a certain period of time. It can also be thought of as the cost of not having money for one period, or the amount paid on an investment per year or specific time period. (Jackzo, n.d.)
The time value of money is the mathematical process of translating a value today into a value at some future point in time.
The notion that money has a time value is one of the most basic concepts in investment analysis. Making decisions today regarding future cash flows requires understanding that the value of money does not remain the same throughout time.
A dollar today is worth less than a dollar sometime in the future for two reasons:
Reason 1: Cash flows transactions at different points in time have different values relative to that given point in time. One dollar one year from now is not as valuableas one dollar today, because you can invest a dollar today and earn interest so that it grows value into that next year and is greater than the one dollar today.
This means time value of money needs to be accounted for to quantify the relation between cash flows at different points in time.
Reason 2: Cash flows are uncertain. Expected cash flows may not end up being actual cash flows. Uncertainty stems comes from the nature of predictions and forecasts around the timing and the amount of cash flows.
We are not able to know for certain when, whether, or how much cash flows will be in the future.
Uncertainty of future cash flows must somehow be taken into account in assessing the value of an investment (Jain, 2020)

MBA 524 MBA524 MBA/524 Week 4 Assignment The Time Value of Money CH.docx

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