Hi Ronald, I agree with you on the definition of the time value of money in that a given amount of money at one point may be worth more or less in a future date. It is also true that if one has a dollar today; it is worth more than the expectation to receive from a dollar in the future (Brigham & Ehrhardt, 2016). The time value of money can be used as a concept that explains the value of cash flows that have occurred at different points in time. It is correct to state that the amount of money held today is more than what could be held in the future because it can be invested and earnings in the interest can be made (Brigham & Ehrhardt, 2016). Time value can be actively used by managers to determine the present value of a stream of cash flow as well as a sum of money. I agree with you that the best example of the use of the time value of money is a company investing in a piece of equipment or a building (Brigham & Ehrhardt, 2016). I agree with you that the net present value is regarded as the direct measure of contribution to the stakeholders in a business. The net present value, therefore, becomes an essential measure of the value of an investment (Hicks, 2017). It is true that it presents the corporate managers with a decision tool that enables the managers with understanding and customization that determines if there will be a gain or loss in the investment in question. The internal rate of return, as you have correctly explained, indicates the return on the original money invested in a project (Hicks, 2017). Agreeably, the internal rate of return utilizes the cash flow and recognizes the time value of money with the project. The method is transparent and clear as you stated which provides the managers with the assurance in their calculations that seek to utilize the time value of money such as in the long-term investment projects (Hicks, 2017).
References
Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th Ed.). Nelson Education.
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Hicks, J. R. (2017). From ‘Value and Capital’. In Bond Duration and Immunization (pp. 57-61). Routledge.
