The opportunity to earn interest on the firms funds

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Unformatted text preview: ity to earn interest on the firm’s funds makes the timing of its cash flows important, because a dollar received in the future in not the same as a dollar received today. Thus, money has a time value, which affects everyone—individuals, businesses, and government. In this chapter we explore the concepts related to the time value of money. B LG1 The Role of Time Value in Finance Financial managers and investors are always confronted with opportunities to earn positive rates of return on their funds, whether through investment in attractive projects or in interest-bearing securities or deposits. Therefore, the timing of cash outflows and inflows has important economic consequences, which financial managers explicitly recognize as the time value of money. Time value is based on the belief that a dollar today is worth more than a dollar that will be received at some future date. We begin our study of time value in finance by considering the two views of time value—future value and present value, the computational tools used to streamline time value calculations, and the basic patterns of cash flow. Future...
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