Give one example of how in bus

Time value is a very important concept for business, becausemoney changes its value over time. e.g. things that we can buytoday in $1, we will not be able to buy same quantity in $1 after10 years. Or we can say that money today is worth more than thesame quantity of money in future.We can understand the importance of time value in business byfollowing example:

Suppose business is thinking purchasing a new productionmachinery, which will cost $10,000, and it will generate $1,200 ayear in net cash flow for 10 years, for a total of $12,000. On theface of it, the project looks like a profitable, but that’s beforetaking into account time value. Now say you’d borrow the money forthe project at 5 percent annual interest, with the loan repayableover 10 years and $1295 is to be paid annually. To be worthwhile,the project must not only pay back its upfront cost but also coverthe interest on the loan. So you’d use 5% as your discount rate. Atthat discount rate, the combined present value of those cash flowsis about $7,300. As we can see after taking time value into accountproject will not be able to recover interest on the loan.Hence machinery is not at all profitable.

In your personal life, time value of money plays a veryimportant role in taking decisions regarding, loan repayment,borrowings, retirement decisions, savings etc.Assume, for example, that you want to guarantee you’ll receive$2,000 each month after your retirement. You decide that you want ainvestment, so you choose to invest money into a fixed deposit thatwill make payments each month to you for the rest of your life onceyou retire.Assume your deposit grows at a rate of 3.5 percent annually.You would need to deposit $400,667 today (present value) inexchange for the security of your $2,000 monthly payment for life.And that’s how you can anticipate you’ll live a long happylife.