The Time Value of Money

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Purpose of the Report The purpose of this report is to discuss the time value of money, and illustrate that I understand the concept. First, there will be an explanation of the key concepts of time value of money, including why it is important to know what these concepts are and how they are applied to the real world. The report will also contain several calculations made using present and future value tables. The calculations illustrate that not only do I understand the concepts but that I can apply them to mathematical computations. 1. The time value of money is a concept that reflects that money changes value over time. The primary factor that causes this change is inflation. Essentially, as the result of inflation money received in the future is not worth as much as money received today (Carther, 2012). Simply, one cannot buy as much with a future dollar as one can buy with a dollar today. The time value of money concept is applied to finance to allow people to gain a more accurate reflection of the value of future cash flows. 2. It is important for financial managers to understand the concept of the time value of money. There are a few reasons for this. The first is that financial planners deal with future cash flows. These include things like interest-bearing investments, but also the future value of accounts that their customers will have. It is imperative that financial planners have a good sense of how their strategies will affect their customers, and

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