Concept of Time Value of Money in Association to Corporate Managers
The TVM concept is essential in making decisions in capital budgeting since it permits owners of small businesses to alter cash flow for the time passage through present value. This permits the dollars preference received today against that received in the following day. Therefore, the Time Value of Money makes corporate manager to appreciate that the value the money have today may be different with the value of the same amount tomorrow while budgeting (Merritt, 2015).
Ways in Which TVM can Help Corporate Managers
One of the methods of TVM which can assist corporate managers in general include the net present value method that employs the TVM to establish if the a project is gainful even after altering the TVM. The second method is the internal return rate techniques which employs the net current value technique in reserve. This technique establishes the discount rate, provided the undiscounted project’s flows of cash that result in zero net present value.
Pros and Cons of Sinking Funds
Sinking funds involves repaying money which was borrowed via a bond issue. One of the major pros of the sinking fund can assist reduce debt and reduce costs. The bond issue is structured to assist raise capital though it is possible it improves inflows and the issuer is in a position to repay the debt before time. The investor can as well select to buy bonds with sinking funds so as to limit risks. However it also has some cons which include that when a firm uses a sinking fund, it is going to use the money periodically to buy a number of the bonds early. This means the investor is going forego the interest payments. Moreover, the company contains the right to buy the bonds at discount. Therefore bond holder makes loses (Drake, 2015).
Importance of TVM Knowledge to the Managers
The Time Value of Money knowledge would help the financial managers in budgeting and making profitable investment. This is because a financial manager can be able to predict the profitability of an investment before making it.
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