Time Value of Money

The Time Value of Money is an important concept for companies to understand. It is "the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity" ("Time Value of Money", 2012). With finance, if money can earn interest, it is worth more sooner than later no matter the amount. Genesis Corp. needs to look at certain aspects of Time Value of Money such as Future Values and Present Values so that we may better understand our finances to make our company more valuable.

When future values are being calculated, it helps to remember that "A dollar in hand today is worth more than a dollar to be received in the future--if you had the dollar now you could invest it, earn interest, and end up with more than one dollar in the future" (Brigham & Ehrhardt, 2010, p.126). When we go ahead from present value to future value, it is called compounding (Brigham & Ehrhardt, 2010, p. 126). When figuring the future value of $100,000 for ten years, you will notice the different interest rates of 2%, 5%, 8%, and 10%. Notice, the higher the interest rate, the higher the future value becomes. For example, take a look at the 2% interest rate which, after calculate, comes out to a future value of $121,899.44. Now take a look at the 10% interest, which makes the future value come out to $259,374.25. This shows how an investment can decline or grow over time. If the interest rate is 10% per year, your funds will grow by 10% per year. However, if the interest rate is 2% per year, your funds will grow by only 2% by year. Genesis must think about interest rates and inflation as they invest or put money into savings. The reason for this is, depending on the amount of interest or inflation, the money Genesis wait to invest until later may be worth significantly less in the future.

Now we must talk about present values. "Finding present values is called discounting, and as previously noted, it is the reverse of compounding: If you know the PV, you can compound to find the FV; or if you know the FV, you can discount to find the PV" (Brigham & Ehrhardt, 2010, p. 134). It is important to note, that when finding the FV, you work from left to right and multiply the initial amount and each amount after. However, with present value, you work from right to left and divide the future value and each amount after. Looking at the different present value amounts we came up in question 2 shows us something interesting. As the payment date is extended further into the future, the present value to be received in the future decreases and begins to get closer to zero. For example, if you look at year 2, the present value ended up being ($128,600.82). The present value of year 7 is ($58,349.04). However, year 10 is all the way down to ($46,319.35) which is much closer to zero than all the other years. Genesis must keep in mind that "At