Week 6 The Conceptual Framework

The Conceptual Framework

Recall from the overview of this week’s lesson that when people speak of the time value of money they are talking about the fact that dollars to be received or paid at different times are worth different amounts today. For example, if someone offered to sell you a note that promised the bearer a dollar a week from now, you would not be willing to give them a dollar for it today. You might be willing to pay $.80 in exchange for the dollar next week, but you would not be willing to pay a whole dollar for it. In other words, a dollar to be received next week is worth less than a dollar today. That’s why we say money has time value.

Why it is important for you to know about the time value of money...
The fact that a dollar to be received next week is worth less than a dollar to be received today is important in finance because the value of a business firm is, fundamentally, the sum of the values today of all the dollars expected to be received by the business firm in the future. We have said that the basic job of a firm’s managers is to maximize the value today of all those future dollars. In order to make that happen managers of businesses must be able to make decisions about future dollars and to do that they must be able to work with time value of money problems.