ms6012 M3A1 – Expert Writers Hub | expertwritershub.com

Arthur Cooper

    

We can use the equation PV=FV/ (1+r) ^n

PV=present value

FV=future value

R=discount rate

N-number of period

$2million/(1+.05)^10

2/(1.5)^10

2/1.6=1.25million

FVA=A[{(1+r)^n-1}/r]  2=A[{(1.05)^10-1}/r

2=[1.3-1]/.05 

2=.3/.05=6

2/6=.333million 

Time value of money describes the greater benefit of receiving money now rather than later (Keat 2013). This helps to explain why interest is paid or earned. This concept can be determined by calculating the value of money invested overtime showing it will be worth more than its current value. This is how most businesses will decide how or where to invest capital to gain revenue over time. This can be done by purchasing new machines expanding operations or even adding to the existing workforce. TVM is used to show how money can be invested over time to gain value in this case how to add value to money over time (Keat 2013).

Time value of money describes the greater benefit of receiving money now rather than later. As stated by Keat (2013) the money that companies have in the present can be used to generate more wealth instead of receiving the same money later. The International Accounting Standards Board (IASB) has been developing ways to implement a new standard for international contracts based on fair value (Nguyen& Molinari 2011). These attempts lead to the organization dividing the project into two separate phases (IFRS 4 and a discussion paper in 2007). The first phase IFRS 4 allowed organizations to retain their current format and the discussion papers were based on a Current Exit Value. To reduce criticism the IASB decided to let their customers determine the value of their insurance liabilities. This became the foundation of cash flows for time value of money and the effects of uncertainty surrounding future cash flows. Capital budgeting refers to the expenditures and receipts that occur over a period of time Keat (2013). The IASB attempted this feat by allowing their insurers to base their cash flows on their own valuation.