Time Value of Money Time Value of Money To make yourself as valuable as possible to shareholders; a company must choose the best combination of investment, financing and dividend decisions. In any economy where businesses have time preference, the time value of money is an important concept. Shareholders will pay more for an investment that promises returns in years 1 to 5 than they will for an investment that promises identical returns in years 6 to 10. Essentially, one must determine whether the future benefits are great enough to justify the current expenses. . The development of mathematical tools of the time value of money is important as a first step towards capital allocation decisions (Malawi, 2008). Financial Applications of the Time Value of Money The time value of money essentially means that today's dollar is worth more than if I would have received the same amount at a later time. Whenever you decide to allocate capital, make purchases of new plant and equipment, or introduce a new product, you must determine whether the expected future benefits are large enough to justify the current expenditure. The concept discussed above has many applications for a given interest rate which calculates the future value of a compound amount over a period of years, present value of a discounted amount over a period of years, future value of the annuity, present value of the annuity and method of calculating mortgage amortization. Applications include retirement plan choices, capital investment strategies such as purchasing versus leasing decisions, and personal choices regarding annuities, to name a few. Choices regarding retirement and how to save are relatively simple and can be evaluated using two of the concepts of time value and fair...... middle of paper ......87. Retrieved from University of Phoenix EBSCOHost database on March 13, 2008 Investopedia ULC. (2008). Future Value (FV). Retrieved March 14, 2008, from http://www.investopedia.com/terms/f/futurevalue.aspLeinberger, C., (2001). Financing progressive development. Retrieved March 13, 2008, from http://www.brookings.edu/articles/2001/05metropolitanpolicyleinberger.aspx.Malawi College of Accounting. (2008). Time value of money. Retry March 7, 2008 from http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page33.htm.Olu-Tima, T. (2003). Acceptable project investment criteria. AACE International Transactions, retrieved March 17, 2008, from the Business Source Complete database. Roley, V., & Sellon, G. (1995). Monetary policy actions and long-term interest rates. Economic Review (01612387), 80(4), 73. Retrieved March 16, 2008, from the Academic Search Premier database.