The time value of money
The time value of money is a critical concept to understand in accounting, especially when working with loans, investment analysis, and capital budgeting decisions. Time value of money can be used to decide which projects to start and what investments to make.
Please respond to the following:
- Explain two decisions a CPA might make (such as lease payments, bonds, and postretirement benefits) using the time value of money. Be sure to provide specific examples.
- Be sure to respond to at least one of your classmates’ posts
The time value of money is a great tool used in the financial industry. Simply stated, the concept is a dollar today is worth more than a dollar in the future due to the opportunities to invest an increase the value of that dollar. Two decision an accountant might make deals with lease payments and the benefits of bond investments.
In the current financial climate, with many businesses still recovering from the effects of COVID 19, some lease contracts have been in jeopardy of default. A lease contract of $27,000 even in a downturned economy has the potential to triple in value given an interest rate of 10% and a due date of 6 years.
The concept of time value is also important when lenders are deciding on investment opportunities. A $777,989 bond paying 8% for 8 years can accumulate to $1.4 million odd. That would be a great long-term investment.