Time value of money application

Essay by hanaahmedUniversity, Bachelor'sA, May 2007

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An important concept in finance is time value of money which means that cash received at different times has different values. A dollar today is worth more than the same dollar tomorrow. Time value of money concepts helps 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 we will identify and discuss how different business use this concept for the betterment of their business.

Commercial banks:Commercial banks uses this concept of time value of money for the betterment of their business. One may wonder, " how does this process work?" commercial banks take deposits from individual and institutional customers, which they then use to extend credit to other customers. They make money by earning more in interest from borrowers of business loans, mortgages, auto loans, and home repair loans; than they pay in interest to those whose deposits they accept.

(wet feet.com, internet) Banks also provide loans in the form of credit card charges, and render local services including safe deposit, notary, and merchant banking. Through this process Commercial banks in the U.S. earn 5 to 14 percent interest on most of their loans. As commercial banks typically only pay depositors 1 percent - if anything - on checking accounts and 2 to 3 percent on savings accounts, they make a tremendous amount of money in the difference between the cost of their funds (1 percent for checking account deposits) and the return on the funds they loan (5 to 14 percent). (college journal.com, internet)Credit card financial service companies:These companies uses the similar concept of time value of money to make money for themselves. Credit cards uses a simple terminology they provide convenience...