Introduction to the Concept of Time Value of Money memo
To: CEO, ABC Golf Equipment Corporation
From: Chief Financial Officer
Subject: Introduction to the Concept of Time Value of Money
Understanding the concept of time value of money is paramount to the successful financial management in an organization. The CEO is in charge of all the operations in an organization. This means that he has to be aware of the historical performance of the company, the current performance, and the expected performance. For the expected performance and return s from various investments, the CEO and the company management in general has to know the exact value of the expected return today to facilitate buying, selling or transacting any business that has a futuristic element. This underscores the centrality of the future value of lump sum, annuity and perpetuity in an organization.
The money owned by the company now is more valuable than the amount of money that it expects to get or to receive in the future and given that the money can earn interest, the amount of money has a more worth the sooner it is received (Megginson & Smart, 2009). If our company, ABC Golf Equipment Corporation, is to receive $100000 in five years or $200000 in ten years at interest rates of 5% and 10%, respectively the value of this amount in the current time is $78352 and $127628. The money is less than the real value due to loss of value of money with time due such factors as inflation. The value of the same money at the end of each period, that is, five years and ten years will be $127628 and $518748. If the company is to invest in annuity investments such as government bonds which pay interest rate per annum of $100000 for five years and $200000 for ten years at interest rates of 5% and 10% respectively, would be aggressively valued at $ 1567052, and $1241842. The future value of the money and the current value of the future cash inflows determines the value of the investment to the company.
The information about the time value of money is very useful to the company given that a dollar vat hand is considered more worth than the one promised in the future, given that the dollar at hand can be invested and earn capital……………………………