Description
The time value of money is a basic financial concept premised on the idea that money presently
on hand is worth more than money received at some future period because of its present
earning capacity. The Time Value of Money is, therefore, an important concept to the financial
manager, in that it aids in making relevant decisions on investment, capital budgeting, loan
management, and long-term financial planning. The Time Value of Money will, however, allow
the financial manager to appreciate the present value of such future cash flows and, thus
ensure efficient resource allocation with the maximization of returns. To determine whether
future cash flows justify initial investments, managers calculate the net present value as well as
other measures based on time value of money, which is essential in the optimization of
shareholder value (Keown, Martin, & Petty, 2020).
Besides, TVM helps financial managers manage debt appropriately. While valuing loan options,
for instance, managers need to understand the overall cost of borrowing over a period; thus,
the importance of considering interest rates and payback schedules. Based on the principles of
TVM, they select the avenues that cost the least in raising funds and ensure long-term financial
survivability. Lack of understanding of the concept of Time Value of Money or TVM by the
management leads the financial managers to make inappropriate investment or borrowing
decisions which may hurt the company’s financial situation. The following simple example will
help explain the concept of Time Value of Money: Suppose someone asked you whether you
would prefer to receive $1,000 now or $1,000 in a year’s time. Clearly, you would take the
money now. If interest rates are 5%, your $1,000 will be worth $1,050 in a year. By delaying your
receipt of the $1,000, you are losing the opportunity to earn that extra $50. This example
highlights that TVM considers the capital’s earning potential ability in the future and thus it has
become a very crucial concept for companies as well as individuals for financial management
(Keown et al., 2020).
Importantly, this importance of TVM is substantially increasing as Saudi Arabia is implementing
its highly ambitious goals of Vision 2030 with the intention of diversifying the economy and
lessening dependence on oil revenues. Most mega infrastructural and economic projects under
Vision 2030 involve long-term investments that demand to be evaluated on the Time Value of
Money criteria. Using the concept of TVM, policymakers and financial managers will be able to
verify that future cash flow justifies initial investments and hence makes such long-term
projects viable and conducive enough to help them realize sustainable economic development
(Alshehri, 2020). Additionally, SMEs must comprehend TVM, as they are crucial elements in the
private sector development under Vision 2030. To the SME, Time Value of Money plays an
important role in analyzing the cost of borrowing and return on investment. With Time Value of
Money, an entrepreneur can understand the long-term implications of any financial decision to
ascertain the sustainability of the business. Without TVM, the SME may incorrectly estimate the
true cost of borrowing, thus compromising their financial stability (Alotaibi & Alghamdi, 2020).
It is important for the general individuals in Saudi Arabia to comprehend TVM, as the country is
moving with aspirations toward Vision 2030. The concept of financial literacy, or more precisely
understanding Time Value of Money, helps an individual make appropriate decisions on saving,
investment, or borrowing. The understanding of TVM will, therefore, enable them to make
prudent financial decisions as the Saudi economy is diversifying and its citizens are encouraged
to avail themselves of the investment opportunities. Similarly, understanding Time Value of
Money helps individuals to strive and enhance their financial strategies in pursuit of
retirements, securing loans, or investing in the stock market to support the overall national
economic goals.
In conclusion, the Time Value of Money has been a crucial principle for the financial managers,
individuals, and policymakers in Saudi Arabia, given the efforts of the nation to meet the goals
outlined in Vision 2030. TVM goes a long way to provide the practical financial decisions about
investment, borrowing, and long-run planning by explaining the trade-off between present and
future value. Full understanding and proper application of the principles of TVM will ensure
investments by all sectors, public and private, are successful and lead to continued economic
growth within the Kingdom.
References
Alotaibi, M. F., & Alghamdi, R. A. (2020). The role of financial literacy in emerging economies:
Evidence from Saudi Arabia. International Journal of Economics and Finance, 12(1), 123133. Available at:
Alshehri, A. (2020). Economic diversification and Saudi Vision 2030: Challenges and
opportunities. Open Journal of Economics and Commerce, 8(3), 45-58. Available at:
on hand is worth more than money received at some future period because of its present
earning capacity. The Time Value of Money is, therefore, an important concept to the financial
manager, in that it aids in making relevant decisions on investment, capital budgeting, loan
management, and long-term financial planning. The Time Value of Money will, however, allow
the financial manager to appreciate the present value of such future cash flows and, thus
ensure efficient resource allocation with the maximization of returns. To determine whether
future cash flows justify initial investments, managers calculate the net present value as well as
other measures based on time value of money, which is essential in the optimization of
shareholder value (Keown, Martin, & Petty, 2020).
Besides, TVM helps financial managers manage debt appropriately. While valuing loan options,
for instance, managers need to understand the overall cost of borrowing over a period; thus,
the importance of considering interest rates and payback schedules. Based on the principles of
TVM, they select the avenues that cost the least in raising funds and ensure long-term financial
survivability. Lack of understanding of the concept of Time Value of Money or TVM by the
management leads the financial managers to make inappropriate investment or borrowing
decisions which may hurt the company’s financial situation. The following simple example will
help explain the concept of Time Value of Money: Suppose someone asked you whether you
would prefer to receive $1,000 now or $1,000 in a year’s time. Clearly, you would take the
money now. If interest rates are 5%, your $1,000 will be worth $1,050 in a year. By delaying your
receipt of the $1,000, you are losing the opportunity to earn that extra $50. This example
highlights that TVM considers the capital’s earning potential ability in the future and thus it has
become a very crucial concept for companies as well as individuals for financial management
(Keown et al., 2020).
Importantly, this importance of TVM is substantially increasing as Saudi Arabia is implementing
its highly ambitious goals of Vision 2030 with the intention of diversifying the economy and
lessening dependence on oil revenues. Most mega infrastructural and economic projects under
Vision 2030 involve long-term investments that demand to be evaluated on the Time Value of
Money criteria. Using the concept of TVM, policymakers and financial managers will be able to
verify that future cash flow justifies initial investments and hence makes such long-term
projects viable and conducive enough to help them realize sustainable economic development
(Alshehri, 2020). Additionally, SMEs must comprehend TVM, as they are crucial elements in the
private sector development under Vision 2030. To the SME, Time Value of Money plays an
important role in analyzing the cost of borrowing and return on investment. With Time Value of
Money, an entrepreneur can understand the long-term implications of any financial decision to
ascertain the sustainability of the business. Without TVM, the SME may incorrectly estimate the
true cost of borrowing, thus compromising their financial stability (Alotaibi & Alghamdi, 2020).
It is important for the general individuals in Saudi Arabia to comprehend TVM, as the country is
moving with aspirations toward Vision 2030. The concept of financial literacy, or more precisely
understanding Time Value of Money, helps an individual make appropriate decisions on saving,
investment, or borrowing. The understanding of TVM will, therefore, enable them to make
prudent financial decisions as the Saudi economy is diversifying and its citizens are encouraged
to avail themselves of the investment opportunities. Similarly, understanding Time Value of
Money helps individuals to strive and enhance their financial strategies in pursuit of
retirements, securing loans, or investing in the stock market to support the overall national
economic goals.
In conclusion, the Time Value of Money has been a crucial principle for the financial managers,
individuals, and policymakers in Saudi Arabia, given the efforts of the nation to meet the goals
outlined in Vision 2030. TVM goes a long way to provide the practical financial decisions about
investment, borrowing, and long-run planning by explaining the trade-off between present and
future value. Full understanding and proper application of the principles of TVM will ensure
investments by all sectors, public and private, are successful and lead to continued economic
growth within the Kingdom.
References
Alotaibi, M. F., & Alghamdi, R. A. (2020). The role of financial literacy in emerging economies:
Evidence from Saudi Arabia. International Journal of Economics and Finance, 12(1), 123133. Available at:
Alshehri, A. (2020). Economic diversification and Saudi Vision 2030: Challenges and
opportunities. Open Journal of Economics and Commerce, 8(3), 45-58. Available at:
Keown, A. J., Martin, J. D., & Petty, J. W. (2020). Foundations of finance: The logic and practice of
financial management (10th ed.). Pearson.
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