The objective necessity of determining the time value of money
When planning for revenue in the settlement of transactions in the financial market should take into account the time factor. It plays no less important than the volume of funds. This disparity is due to the money that belongs to different points in time, ie the value of the hryvnia is now greater than the value of the hryvnia received tomorrow or after a certain time.
The difference in the value of money is due to the influence of several factors, which include inflation or depreciation. In addition, theoretically any amount of money can be invested and bring income. Therefore it is not received money today to consider as unused opportunities to obtain income in the future. As market conditions should be considered a risk factor, because the uncertainty of the future reduces the value of money that can be earned over time.
The value of money affects the propensity for liquidity from investors. It appears that preference is always given to the money that is available today to meet their needs. So if investors invest in projects that are waiting for compensation, that high returns in the future as compensation for the loss of liquidity.
In terms of quantitative financial analysis of funds that belong to different periods of time, you can not miss. Taking into account the time factor in financial calculations carried out by the future value calculations of income (capital) or the present value of future income.
Price money changes over time. The sooner the money, the more value they have. The money is invested in projects that can bring significant income, but may lose their value due to the risk of inflation. Therefore, entrepreneurs, lenders want to know the future value of money or the current value of future income of the risk.
Future value of money can be determined by calculating interest. During percent understand the absolute value of income from money borrowed in any form. The interest rate - the ratio of income paid by a fixed time interval to the value of the loan. The interval, which is dated interest rate, called the period of calculation. Period may be a year, half, quarter, month.
If interest is charged at the end of Period (year, quarter), they are called dekursyvnymy. If interest is charged at the beginning of the year, quarter, etc., they are called antysypatyvnymy.
Dekursyvnyy method of calculating interest is the main and most widely used. Antysypatyvnyy method is used during periods of high inflation or, for example, when discounting bills in the bank.
The financial calculations used mathematical methods to bring revenues in future periods to date period (discounting method - discounting), and determining the future value of cash flow formula simple or compound interest method (increase or compounding - compounding).
These methods are widely used in the financial and investment analysis in the calculation of interest on loans and securities in leasing transactions in determining income on investment and payback terms and so on. Methods discounting and capacity used where necessary to find one of those unknowns:
- The level of interest;
- Annual payments;
- The number of periods (months, quarters, years);
- Meaning the present value;
- The value of future value.