View of A STUDY ON TIME VALUE OF MONEY: FUNDAMENTAL TRUTH

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ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Peer Reviewed and Refereed Journal IMPACT FACTOR: 2.104 (INTERNATIONAL JOURNAL) UGC APPROVED NO. 48767, (ISSN NO. 2456-1037)

Vol. 02, Issue 02,February 2017 Available Online: www.ajeee.co.in/index.php/AJEEE

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A STUDY ON TIME VALUE OF MONEY: FUNDAMENTAL TRUTH

Dr. K Devi

Jeypore (Dist. Koraput), Odisha, India Devadutta Indoria

Assistant Professor in Commerce, Vikram Deb Autonomous College, Jeypore, Odisha

Abstract- With the progression of time, all resources decline in worth and same is the situation with cash. In any case, there is a great deal contrast between different resources and cash. While different resources are utilized without help from anyone else to accomplish the outcome, cash is one part of any exchange. It can likewise be said that cash is consistently one part of all exchanges as the most curious quality of cash is its buying power. As the time elapses, the buying influence of cash diminishes. That implies it would not be feasible to buy same amount of any item sometime not too far off which can be bought today with a cash note of same section. To compensate for this lessening, there can be two different ways. Initial one is to diminish utilization as decreased amount would be bought with same measure of cash and second one is to expand the measure of cash to buy same amount of the product. This decrease in the buying influence of cash I. e. its worth throughout the timeframe is known as the time worth of cash. The worth of cash as on date is known as present worth of cash while the worth of cash on a future date is known as future worth of cash.

Keyword: Money, time esteem, time worth of cash.

1 INTRODUCTION

Time has its effect on almost everything.

With the passage of time the value of any asset eradicates. As most of assets get depreciated over the period of time, so is the case with money. Money is a peculiar commodity because of its different attributes in comparison to other assets.

Firstly, the possessor is the owner of the money. There is as such no paper involved in to claim the ownership of money. Thus, it is riskier to carry money in physical form. Second thing is that money is the only commodity which has got purchasing power. Thus, one part of every transaction is compulsorily money.

Money is the medium of exchange in any economy. These two attributes of money make it risky but an important asset. The purchasing power of money is also known as the value of money. Any change in the purchasing power of money over the period of time is known as the time value of money. Over the years the purchasing power of the currency decreases, especially in the country like ours where inflation is a persisting economic

phenomenon. Inflation is an economic phenomenon in which the general price level of goods and services rise in the economy. Because of the price rise, the consumer is able to purchase less quantity of the commodity in comparison to the quantity he was previously able to purchase with that amount. Inflation affects that money negatively which is held as cash. The purchasing power of such money is reduced over time.

Inflation actually discourages savings. As the inflation rate cannot be predicted too accurately, the investments are not made.

Inflation also encourages storage of commodities as in anticipation of rise in price as the consumer may purchase larger quantities of various commodities in anticipation of future price rise. The inflation and purchasing power are negatively correlated and if the inflation rate is high the purchasing power of money is reduced proportionately. If the inflation rate in the economy is not low or not steady or is unpredictable, there are more chances of awkward behavior by

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2 consumers. Time has its impact on purchasing power of the money.

2 THE CONCEPT OF TIME VALUE OF MONEY

The idea of time worth of cash is easy to comprehend and decipher. The worth of cash influenced with the progression of time is called as time worth of cash. In the time of emptying the worth of cash increments while it is opposite in the event of inflationary period. Cash is the solitary ware having buying power. It is the method for exchange. It is the mechanism of trade. Cash fills the need of trade as it is the proportion of significant worth. The worth is the buying influence of cash which makes it incredible ware.

Besides, if any correlation is to be made in the upsides of cash, not many standards should be followed. Right off the bat the unit ought to be same, similar to all qualities ought to be in same cash.

Besides, the qualities ought to be at same place of time. That implies, Rs 100 today can't be treated as equivalent to Rs 100 sometime not too far off. The worth of cash at various marks of time is diverse like today it is having a particular worth and following one year it will have distinctive worth then following two years, it will have diverse worth. Normally, with section of time, the worth of cash diminishes. The explanations behind the equivalent are portrayed in the accompanying passage. It is qualified to note here that the distinction between the worth of cash today and the worth of same cash on a future date is called time worth of cash.

There is effect of time on the worth of cash because of four reasons. Initial one is the swelling rate. Swelling is a general financial wonder. As a general rule, swelling is a financial condition where costs of products ascend with the progression of time. This would result in either buying less amount with a similar measure of cash or paying more cash for a similar amount of the product.

Consequently, it is said that during inflationary period, the buying influence of cash diminishes. The impact of swelling is the destruction in the buying influence of cash and the worth of cash is all the more today, in contrast with what it would be on a future date. Second justification the effect of time on cash is the danger implied in holding the cash.

Cash held inactively is more defenseless against such danger. Third explanation is the utilization inclination of the customer.

An individual customer has the inclination to devour today over future utilization as future is obscure. The customer utilization inclination additionally affects future progression of cash and henceforth on the worth of cash.

All customers give track down a shot a tradeoff among present and future utilization. Everybody has want of satisfying his requirements today itself and not in future. Present utilization is delayed distinctly in the assumption for having expanded sum on a future date. In case cash isn't devoured today, it can even be utilized to acquire some return.

That implies cash can be contributed today, in a suitable venture road. What's more, consequently, the fourth explanation is the accessibility and allure of venture open doors in the economy. On the off chance that there will be no worthwhile speculation openings accessible in the economy, the customer would like to devour the cash and if yielding venture openings are there in the economy, the cash will be put resources into the need of expanded sum on a future date. For this situation, the buyer will defer present utilization and leave from his cash for quite a while, to put it in a reasonable venture road longing for proper return. Venture implies conceding of present utilization. This load of reasons have their impact on the time worth of cash. When the idea of time worth of cash is perceived, subsequent stage is comprehend the significance of present worth and future worth.

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3 3 UTILITY OF TIME VALUE OF MONEY CONCEPT

As it is seen that customarily the worth of cash was viewed as same at all marks of time. 100 rupee note was viewed as 100 rupee note for eternity. No effect of time on cash was thought of. With the advancement of information, it was perceived that time has its impact on the worth of cash. This prompted the improvement of the idea of time worth of cash. Thought of present worth of cash and future worth of cash gave productive understanding into the effect of time on the worth of cash. At whatever point one needs to get cash in future, it is helpful to ascertain its current esteem and break down it with regards to introduce cash outpouring and required pace of return.

This makes the correlation at of money surges and money inflows at same place of time, which is generally not practically identical, on time premise. The idea of time worth of cash is truly helpful when the money inflows of various mark of time are to be dissected. It makes the incomes practically identical. In the event that the incomes are spread a few years, it becomes hard to look at them. In this manner, the greatest benefit of the idea of time worth of cash is that it brings the incomes of various mark of time at standard, which makes them tantamount.

Presently, bringing all incomes at standard, in itself has a considerable number uses, particularly in breaking down those tasks where the incomes are lopsided and the undertaking life is in years. The associations use the idea of time worth of cash in breaking down, positioning, looking at, short posting and choosing or dismissing different tasks and capital venture openings. In such cases, it is exceptionally important to bring the incomes at same mark of time. Here, the idea of present worth and future worth comes into the light. Hence, another utility of the idea of time worth of cash is the estimation of present worth of any future amount of cash and the other way

around. This settles on the dynamic with respect to ventures simpler. For instance, if Rs 1080 are gotten following one year from today, if Rs 1000 is contributed, it turns out to be not difficult to look at these sums if the worth of Rs 1080 is found as on date. To discover the current worth of Rs 1080, a markdown rate would be required. In the event that the markdown rate is 8%, there is no acquiring and if the rebate rate is underneath 8% there is procuring and if the rebate rate is above 8% there is misfortune. Presently, this computation depends on the idea of time worth of cash.

Singular financial backers use the idea of time worth of cash to break down different venture openings accessible to them. When perceived, the time worth of cash idea is easy to apply and do encourage investigation of speculation openings. Examination of venture openings is should have been done as we realize that profits on the speculations are adversely connected with the measure of hazard related with the speculation. On the off chance that financial backer decides to put his assets in bank fixed stores or government protections called as plated edged protections, he would get least returns, as these are the most protected venture roads as far as reimbursement of chief sum and installment of premium. As the financial backer continues on the continuum of hazard, in the need of expanded return, he needs to dissect the speculation opportunity from various points, similarly as with expansion in hazard just the likelihood of getting more returns increment and not simply the profits.

4 CONCLUSION

Time worth of cash is a significant idea in monetary administration. This idea says that the cash has diverse worth at various places of time. Customarily, the cash was accepted to have similar worth at all marks of time implying that a Rs 100 note was thought to be continually having

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4 buying force of Rs 100. With information improvement, Time worth of cash idea is additionally used with the end goal of valuation of firms at the hour of purchasing and selling of organizations.

The computation of present and future worth of altruism of any business can be ad libbed utilizing time worth of cash idea. This idea is likewise helpful in the event of valuation of firms at the hour of consolidations and acquisitions to settle on the portion of old firms in new firm, share in benefits, dynamic force and so forth The associations likewise utilize this idea with the end goal of computation of sinking store, regularly scheduled payouts in the instances of home loan, rent or tenant contracts and so forth.

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