Strategic Corporate Finance

The time value of money theory states that a dollar that you have in the bank today is worth more than a reliable promise or expectation of receiving a dollar at some future date. You can invest the dollar today and earn a return on that investment, such as interest or dividend payments. Calculations involving the time value of money allow people to find and compare the value of future payments. To do this, five figures come into play: interest rate, number of periods or number of times interest or dividend payments are made, payments, present value and future value.

Present Value’s definition is a simple formula to calculate what a future value of money is worth in the present day. This concept is extremely important to financial calculations both for corporations and personal portfolios. According to Investopedia (2010), present value is defined as “The current worth of a future sum of money or stream of cash flows given a specified rate of return”. This concept is often misunderstood by many people and can be devastating when not considered for future financial planning. The time value of money tells us what the present value of an investment will grow to by a given date. This is its future value. The difference between the present value and the future value depends on how many compounding periods are involved in the investment, and on the interest rate.

One of the most important functions in any company is that of the finance manager. The finance manager has a very important position within a company, and his decisions will determine the financial stability of the company, at least within the areas that fall under his control. It is also his job to make certain that other departments and areas of the company follow their budgets and make the most use of the company's money by avoiding frivolous expenses. Financial management guides to finance manager to make optimum position of funds.

Calculate the future value of the following: FV=PV (1+i) n

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