Financial Tools: Time Value of Money

Time value of money is an important tool that financial managers and other market participants use to assess the effects of proposed actions. Because firms have long lives and some decisions affect their long-term cash flows, the effective application of time-value-of-money techniques is extremely important. These techniques enable financial managers to evaluate cash flows occurring at different times so as to combine, compare, and evaluate them and link them to the firm’s overall goal of share price maximization. It will become clear in Chapters 6 and 7 that the application of time value techniques is a key part of the value determination process needed to make intelligent value-creating decisions.

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