The Role of Time Value in Finance Essay Example | Topics and Well Written Essays - 1000 words

The Role of Time Value in Finance - Essay Example This paper illustrates that time value in finance is considering two views. That time value has future value and present value. A timeline that compounds to find future value and discounting to find present value shows compounding and discounting. Most financial managers will make decisions at time zero. That means that they rely primarily on present value techniques. The time value of money can show a personal finance example too. John Doe places $100 in a savings account paying 8% interest compounded annually at the end of 1 year he will have $108 in the account. The initial principal of $100 plus 8% or $8 in interest will appear in the account at the end of the year. The personal finance example would show that Jane Doe places $800 in a savings account paying 6% interest compounded annually. She wants to know how much money will be in the account at the end of 5 years. Time value of money is a critical financial tool to use as a financial manager or to figure one's own individual finances. The second most important concept is that a financial manager must learn to assess two key determinants:   risk and return.   The risk is the chance of financial loss.   Assets having greater chances of loss, viewed as riskier than those with lesser chances of loss are. In financial management, the risk is a term that is interchangeable with uncertainty to refer to the variability of returns associated with an asset.We need to understand what return is and how to measure it. The return is the total gain or loss experienced on an investment over a given period.