Time Value of Money Application Paper

IntroductionAn important concept in finance is time value of money (TVM), which means that cash received at different times has different values. A dollar today is worth more than the same dollar tomorrow. TVM concepts help a manager or investor understand the benefits and the future cash flow to help the manager or investor if the future benefits will justify the initial cost of the project or investment. In this paper, I will identify and discuss how different businesses use this concept for the betterment of their business. (Moyer, 1998)Commercial banksCommercial banks use the concept of TVM for the betterment of their business. Commercial banks take deposits from individual and institutional customers, which the bank then uses to extend credit to other customers. They make money by earning more in interest from borrowers of business loans, auto loans, mortgages, and home repair loans than they pay in interest to those whose deposits they accept.

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(Block and Hirt, 2002) Banks also render local services including notary, safe deposit boxes, and merchant banking as well as provide loans in the form of credit card charges.

Through this process, Commercial banks make a tremendous amount of money in the difference between the costs of their funds. Banks earn 5 to 14% interest on most of their loans and only pay depositors 1%, if anything, on checking accounts and 2 to 3% on savings accounts. (College Journal, 2007)Credit card financial service companiesThese companies use the similar concept of TVM to make money for themselves. Credit cards use a simple terminology they provide convenience and allow the consumer to make purchases with nearly a month to pay for them before finance charges kick in. The drawback is many consumers are unable to take advantage of these benefits because they pay finance charges when...