Page 21 - Construction Talkies_Issue#32_March 2018

Construction Talkies Volume 32 March 2018

POWER DOSE Geeta Manglani

Credit Controller
cum Business Analyst

Time Value of Money
Hence, in this case, it seems that not investing and keeping the money in the
Money Collected Today Is Not Equal to Money Collected Tomorrow bank with risk free rate of interest is a better option.
Here we compared the option by evaluating the value of money over time. To
Have you ever realised that money value today is not equal to money value tomor- simplify this method, we can just use present value of money concept.
row? Have you come across investment plans, which offer you lakhs of rupees Formula for present value is as below
after 15/ 20/ 25 years? The value seems to be big today…you are tempted to
n
invest…but will you feel the same about it in future after these 15/20/25 PV = FV X [1 + (1+ i ) ]
years…Think! Think again!
Where, PV= Present Value, FV= Future Value, i= rate of interest, n= no of years.
Let us take an example now : Now, in the same example we will just use the present value of money

Suppose the risk-free rate of interest is 10%. Suppose you do not have immediate
need of money, which investment option would you select?

By looking at the amount, Rs. 120 seems to be most attractive. That is the biggest
amount of money in the available options. So, by selecting this option you would
lose the 10% risk free rate of interest. The conclusion is the same - Option 1 is better!
Now let us evaluate So, whenever we talk of money – It’s not just the amount of money that matters.
What also matters is when you have to get/ give the money.
This is one of the most useful concepts in finance. Many companies including
Atlas Copco have their investment evaluation based on this concept.
I hope by this, I have been able to introduce this concept. You can use this per-
sonally to evaluate the investment options, which your banker advises you.
Also, if your receivables are delayed by a few days, you know what we lose (the
invisible interest component).
May be this is the reason why Time is called Money!