Essay Example on the Time Value of Money: Analyzing Financial Decisions for Businesses

Introduction

Finance encompasses the process that people, companies, and governments go through to acquire money and how they either spend or invest it (Robberge, 2018). Therefore, understanding how people make financial decisions is crucial in ensuring that one effectively caters to their rights. This research discusses the issue of financial decisions while demonstrating how one can use the time value of money to make a business decision. The paper also analyzes how people tend to make financial decisions when faced with uncertainty.

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How People Make Financial Decision and the Importance of Time Value of Money

According to Rahman (2018), people tend to make different financial decisions throughout their lives because their needs vary from one person to another. Also, people's needs tend to change with time. Therefore, the concepts of the time value of money are crucial when making viable financial decisions. For example, one could rely on the time value of money concept while making a business decision involving an investment, such as purchasing various assets, including land, machinery, and real estate. It would be crucial to acquire an asset such as real estate at a time when the interest rate is lower than when it is high (Robberge, 2018). Afterward, it would be crucial to develop and improve the real estate before selling it off to a predetermined customer when the interest rate is higher to make more profits.

How People Make Financial Decisions When Faced With Uncertainty

Irena (2017) defines uncertainty as a doubt which occurs when people feel as if they are not sure with the best alternative to undertake. People use different strategies to make decisions when faced with uncertainty. The most common and effective strategy entails seeking sufficient information and knowledge regarding the available alternatives before making a reasonable selection among them (Rahman, 2018). For example, the best way to decide on whether to invest, such as purchasing a real estate over land for construction, would entail seeking information about their associated benefits and setbacks. The best decision, in this case, should come from the option that bears more benefits than drawbacks.

Conclusion

Finance is a vital study that deals with money and how people, groups, and organizations use it. Understanding how people make decisions is crucial in addressing their needs. People face multiple challenges while trying to make viable decisions. However, developing more knowledge about the available alternatives can lead to appropriate choices, as discussed in this paper.

References

Irena, M. (2017). The time value of money in financial management. "Ovidius" University Annals, Economic Sciences Series, 17(1), 593- 597. Retrieved from http://stec.univ-ovidius.ro/html/anale/ENG/2017-2/Section%20V/19.pdf

Rahman, M. (2018). Time value of money: A case study on its concept and its application in real life problems. International Journal of Research in Finance and Management, 1(1), 18-23. Retrieved from http://www.allfinancejournal.com/article/view/5/1-1-5.

Robberge, E. (2018 June). How short-term financial decisions dramatically impact long-term wealth. Forbes. Retrieved from https://www.forbes.com/sites/ericroberge/2018/06/25/how-short-term-financial-decisions-dramatically-impact-long-term-wealth/#4eb611634829.