Opportunity Costs and the Time Value of Money - Business Finance - ثاني ثانوي

5 Opportunity Costs and the Time Value of Money What would you give up today to have a secure future? Investors put money into ventures now in the hope of getting a return late

ارة المسلية LEARNING OBJECTIVES Once you have completed this chapter, you should be able to: Identify personal and financial 1 opportunity costs. 2 Calculate the future value of a single amount. Calculate the future value of a series 3 of amounts (annuity). 4 Calculate the present value of a single amount. Calculate the present value of a series 5 of amounts (annuity). Understand other time value of money 6 situations. 187

Pul . 18 Business Finance Key Terms Compounding Discounting "he basis of the time value of money is money makes money, and a Riyal received in the future is not equal to a Riyal received today. The time value of money, which in many societies is based on an interest rate, is the cost of money borrowed or lent. Interest is a type of rent, the fee for using the money of someone else. The time value of money is based on the fact that a Riyal received today is worth more than a Riyal received later, because one Riyal received today can be saved and invested and will be worth more than a Riyal in the future. Similarly, a Riyal that will be received one year from today is currently worth less than a Riyal today. The time value of money is a vital element of business and personal finance that can help you make decisions such as: ⚫ "If I deposit SAR 6,000 today, how much will I have in five years?" ⚫ "Will SAR 16,000 saved each year give me enough money when I retire?" . ⚫ "How much must I save today to have enough for my future education expenses?" In addition to these personal financial decisions, the time value of money is used each day for business decisions. For example, if an investment in plant and equipment costs SAR 120,000,000 and creates an annual cash flow of SAR 18,210,000 for seven years, what is the investment's return? The cash outflow, or money leaving a business, is in the present, but the cash inflows, or money going into a business are in the future. Time value of money calculations equate these cash inflows and outflows to determine the return. Once the expected return is calculated, the financial manager will decide whether to proceed and make the investment. These types of business investments contribute to support the objectives of Saudi Vision 2030.

The time value of money involves two major types: 1. Future value. With future value calculations, also called compounding, you are given an amount to save or invest, and you calculate the amount available at some future date. 2. Present value. With present value, calculated through a process called discounting, you are given the amount that will be available at some future date, and you calculate the current value based on a specific rate of return (See Figure 5.1). The process of determming the present value of a payment that Is to the received in the future Amount Nory FUTURE VALUE (compounding) FIGURE 5.1 Time Value of Money PRESENT VALUE Amount Later (discounting) Time value of money refers to increases from earnings over time. With future value (compounding), the current amount grows to a greater future amount. Present value (discounting) determines the present amount that will grow to the desired future amount. In this chapter, the four basic time value situations are discussed: 1. the future value of a single amount; 2. the future value of a series of amounts (an annuity); 3. the present value of a single amount; and 4, the present value of a series of amounts (an annuity). Each situation is explained and illustrated using several calculation tools. وزارة التعليم " CHAPTER Opportunity Costs and the Time Value of Money 189