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The Time Value of Money

As Individuals and corporates we need to estimate the amount of money we are going to invest based on the return on investment we are going to have. Simply, it means a financial move for an financial achievement attached with TimeValueOfMoney.

A simple example would be - Nightingale corporation ltd. is planning to expand it's business by investing and adding a new machinery for its business to create more revenue channels. Adding a new line or product would mean adding the machinery, hiring more workers, hiring a line manager.

Plus, buying a machinery is considered an initial cost and cost of borrowing if the investment fund is obtained as loan from bank.

Hence, having all these in mind the the risk of this planning requires further estimations and planning where it involves calculating The Time Value of Money. Having in mind that calculating an estimation of return for example in the next 5 years from now, would help the business decision makers to come up with a reasonable investment plan.

Briefly, the main 2 methods used are NPV and IRR as you might be able to find them in our financial calculator. Here is a simple example for better understanding taken from CharteredFinancialAnalyst book published by PEARSON -

The Japanese compan Kageyama Ltd. is considering whether or not to open a new factory to manufacture capacitors used in cell phones. The factor will require an investment of Y1'000.00 million. The factory is expected to generate level cash flow of Y294.8 million per year in each of the next five years. According to information in its financial reports, Kageyama's opportunit cost of capital for this type of project is 11 percent. 

Determine whether the project will benefit Kageyama's shareholders using the NVP and IRR.


Kiarash Oveisiarian

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