Time Value of Money and Financial Statement Analysis (Essay Sample)

Introduction
The concept of time value of money is one of the fundamental concepts in the field of finance. It simply posits that a dollar today is worth more than a dollar at a future date. There are various reasons that have been put forward to explain the time value of money. One of them is the fact that almost every economy experiences inflation every year. Inflation is defined as the general rise in the prices of commodity without an accompanying rise in income of the consumers (Rappaport, 2006). This causes the purchasing power of a dollar to fall and in effect, a consumer needs more dollars in order to maintain the same consumption levels he/she had before the inflation (Hillman & Keim, 2006).
It is from this concept that finance scholars came up with the idea of the time value of money. Since its inception, it has become a major decision point on many finance decisions and has in effect, given rise to many tools to evaluate the time value of money (Rappaport, 2006). Finance decisions which are based on Time value of many are investments, Financing, operating, and even revenue distribution decisions such as coming up with dividend policies.
In order to evaluate the time value of money, investors come up with a discounting rate which they use to calculate the present value or a future value of a given amount of money. The discounted rate, commonly referred to as the cost of capital is usually the minimum rate of return which money lenders are willing to lend out their money to borrowers. This forms a major decision point since any offer of a less return than the discount rate always indicates that the investment project is not financially viable. This report presents both the present value and future value of given amounts of money. The cash flows analyzed are lump sum, annuities, and perpetuities.
Present ValuesAmountDiscount ratePeriod (Yeaars)PVIFPresent Value1 $ 100,000.00 5%5Top of Form
0.7835
Bottom of Form $ 78,350.00  $ 200,000.00 10%10Top of Form
0.3855
Bottom of Form $ 77,100.00  Future Values FVIF2 $ 100,000.00 5%5Top of Form
1.27628
Bottom of Form $ 127,628.00  $ 200,000.00 10%Top of Form
2.59374
Bottom of Form $ 518,748.00  $ - 3 Present Values of Annuitiess PVIFA $ 100,000.00 5%54.3295 $ 432,950.00  $ 200,000.00 10%106.1446 $ 1,228,920.00 4Future Value of annutiesFVIFA $ 100,000.00 5%55.5256 $ 552,560.00  $ 200,000.00 10%1015.9374 $ 3,187,480.00 5Preent Value of perpetuitiesPVIF $ 100,000.00 5%5 $ 2,000,000.00  $ 200,000.00 10%10 $ 2,000,000.00 
The various measurement parameters which are used alongside the discount rate are discussed in the ensuing text as presented in the above table. The first parameter is the present value. This is the value that is attached to a future receipt of payment of some money at a discounted rate of return. In the case below, the present value of $100,000 that is to be received 5 years from now is $78,350. What this ideally means is that an individual who expects to receive $100,000 in five years can calculate what that amount of money is worth today. With the discounting rate of 5% per year, the value of the $100,000 is discounted to become $78,350. The higher the discounting value of a present value, the lower the present value. For instance, if the discounting value of the $100,000 was higher than the given 5%, the present value would be significantly lower than the current $78,350
The Second parameter is the future value. This is the opposite of the present value. It is usually the future value of a certain amount of money one has at the presently. It is particularly useful when determining if a project is viable since the discounting rate is usually the rate of return which is given to the money lender (Coase, 2008). The future value therefore, will always give an indication of whether the returns expected from a project result in wealth creation or not.
There are different scenarios where the present value and future values are calculated. Th...