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ABC Company is supposed to receive US Dollars One Thousand Today and another One Thousand after one year. As a financial manager, will you value the receipt of both amounts equally ? Give your answer with brief reason in support.
Time value of money means,Monet loses its purchasing power over time.1000$ today is not equal to1000$ which is to be recieved in one year.Suppose i bought a pair of shoes for Rs1000 this year,cuz of inflation i am not going to get the same pair for1000Rs,it has to compensate for inflation....
As a financial manager I won't be valuing the receipt of both amounts equally as time value of money comes into the play. That is, cash flow we receive during next year will not be worth of what we receive in the current year despite the sum being same.For instance, The money we need today to buy certain goods might not help us to buy the same product in the next year due to the inflation as a result of demand pull or cost pull etc.
Similarly, A dollar in hand today is worth more than a dollar to be received in the future, as amount in hand will allow us to invest and garner returns.
As per the question,I have $1000 and will receive $1000 after one year. And, If I invest the money I have in a saving schemes that is offering5% p.a, I will achieve $1050 after one year, which is $50 more than what I will be receiving in one year time.
Agreed with colleagues answers
