Objectives of Time Value of Money

Time value of money concept is the part of financial education and awareness. Its objective is to teach the value of money which will increasing only due to spending of money. So, do not waste it without reward.

Today, your one dollar can work hard in different businesses and it can become 2 dollar in tomorrow. If you are so strict, you can take more work from your one dollar and it will give you 4 dollar tomorrow. Even, if you are so sleep, you can deposit it in your saving bank account, still, you will get 4% p.a. interest on your one dollar.

Following are the objectives of Time Value of Money in Detail 

1. With this, You can Calculate the Future Value of Money

Time value of money teaches you that today 1$ value will not equal to the end value of money. You have right to get interest. This interest may be simple and compound. So, future value can be changed by changing the time period, rate of interest and method of calculating interest. With learning detail theory of time value of money, do some practical and learn to calculate correct future value of money.

Following is simple formula of calculating the future value

FV = Principle ( 1+r /100)^ t

2. If You Have Future Value of Money, You can Calculate Present Value of Money 

If you have give the offer of  $ 5,00,000 at the end of 5th year with  10% rate of interest, you can find what is the today money which you will give. On this basis, you can decide whether you can give or not.

Following is simple formula of calculating the future value

FV /  ( 1+r /100)^ t   =  Principle

3. Calculating the Rate of Interest 

If you have the principle value and future value, you can calculate the rate of interest. Before this, you to check whether your future value is on the basis of compound interest or simple interest.

If it is on the basis of simple interest

Simple Interest = Principle X Rate of interest / 100 X time

Rate of interest =  Simple Interest  X 100 X 1/ time X 1 / principle 

If interest is calculated on compound basis

Rate of Interest = [{ ( FV / Principle ) ^  1 / t } - 1 ] X 100

4. Calculate the Value of Installment 

If you are returning your debt with paying per month or per year installment. Bank or financial institute will get both principle and interest from each installment for reducing the risk of losing his interest. It can also be calculated to understanding the time value of money deeply.

5. Solve the Problems of Loan

All type of loan problems can be solved with help of better calculating the time value of money. For example, if a person is interest to give interest with his salary. He has not other source of money. Because he is taking big amount of debt. Job is also not secured like Govt. secured. So, you can stop to give debt to him because time value of money. It is the rule of time value. Your money will rise without risk because there lots of banks who gives you security of your money and interest. There are lots of businesses which give the asset by taking your cash and same assets will give you big profit. Due to inflation. Same assets' value will increase and if you will sell in scrap, you will cover all your loss.

Related : Meaning of Time Value of Money 


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Accounting Education: Objectives of Time Value of Money
Objectives of Time Value of Money
Accounting Education
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