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Time value of money


Time value of money

Time value of money means the receivable money is today is more valuable than if it received in next year in accounting period.  There have a certain cause of happening that.  If any company received money today, there creates an opportunity to invest a portion of received money and can gain earn from investment. 

If any company received 1000 dollar today and invest 8 parent in business to earn and finally profits 80 dollar in accounting period.  The receivable amount will reach in 1080 dollar. 

Hence,  the received amount today 1000 dollar is equal to the received amount 1080 after a one year of accounting period.

The time value money of 8 percent means that today's receivable money is equal to 8 percent more than one year next receivable amount.

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Internal rate of return

Internal rate of return is a discounted rate that makes NPV equal to zero. Internal rate of return simply define as IRR. IRR determines that if any project will be accept or reject. There have a certain condition on IRR that determines that the project will accept or not.  Let initial investment 100 dollar, after a one year expected to gain 130 dollar. NPV= Negative value of initial investment + FV/(1+r) = -100+130/(1+.08) Here, r is 8 percent =20.37 Here, NPV is greater than zero Project should accept. Again let us calculate IRR, IRR makes NPV is equal to zero. NPV = -100 + 130/(1+R) 0 = -100 + 130/(1+R) R = .30 30 percent Hence, R is greater than r Hence, project is accepted
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