First, the meaning of time value of money and its causes

The time value of money refers to the value difference of a certain amount of funds at different time points. It reflects the difference in capital appreciation ability between a sum of money now and the same amount of money in a certain period in the future due to time factors or time delay. Both the circulation of funds and the appreciation of currency need more or less time. Every time a cycle is completed, the money will increase by a certain amount, and the more times it is transferred, the greater the appreciation. Therefore, with the passage of time, the total amount of money increases geometrically in circulation and turnover, making money have time value. There are three main reasons for the time value of money:

1, the time value of money is the embodiment of resource scarcity.

Economic and social development consumes social resources, and existing social resources constitute existing social wealth. The future material and cultural products created by these social resources constitute the future social wealth. Because social resources are scarce and can bring more social products, the utility of commodities now is higher than that of future commodities. Under the condition of monetary economy, money is the embodiment of commodity value. The present money dominates the present goods and the future money dominates the future goods, so the value of the present money is naturally higher than that of the future money. The market interest rate is a reflection of the average economic growth and the scarcity of social resources, and it is also a standard to measure the time value of money.

2. The time value of money is an inherent feature of currency in circulation under the credit currency system.

Under the current credit currency system, the currency in circulation consists of the base currency of the central bank and the deposits derived from the commercial banking system. Due to the increasing trend of credit currency, currency depreciation and inflation have become common phenomena, and the value of existing currency is always higher than that of future currency. Market interest rate is a reflection of loanable funds's situation and inflation level, and reflects the degree to which the value of money has declined with time.

3. The time value of money is a reflection of people's cognitive psychology.

Due to the limitations of people's understanding, people always have a strong perception of existing things and a vague understanding of future things. As a result, people have a general psychology, that is, they pay more attention to the present and ignore the future. The current currency can dominate the current commodities to meet people's real needs, while the future currency can only dominate the future commodities to meet people's uncertain future needs. So the value of unit currency now is higher than the value of unit currency in the future. In order to make people give up circulating money and its value, they must pay a certain price, and interest rate is this price.

When understanding the time value of money, we should pay attention to two points: first, the time value of money is the average profit rate of funds in society without risk and inflation. If there are risks and inflation in society, we need to take them into account. Second, the unit monetary value at different time points is not equal, and the monetary revenue and expenditure at different time points need to be converted to the same time point for comparison and related calculation. Therefore, we can't simply compare the funds at different times directly, but we should convert them into the same time and compare them again.

For example, if you plan to invest in a steel plant, the problem you face is that if you develop it now, you will get a profit of 500 thousand immediately. If it is developed after 5 years, you will get a profit of 800,000 yuan due to the rising steel price. When should this person choose to invest? Some people advocate reinvesting after five years, because 800,000 is obviously more than 500,000, while others advocate that the time value of money should be considered. In other words, if you make a profit of 500,000 by investing now, this 500,000 can be reinvested. At that time, the average social interest rate was 15%. Then five years later, 500,000 yuan will become 1 10,000 [50× (1+15% )×1.15. In this way, you will earn more money after considering the time value of money. If you don't consider it, your steel plant investment will not fail, but it is certainly not the most scientific.

Second, the application of time value of money in enterprise investment decision-making

Because the time value of money exists objectively, it should be fully considered in all business activities of enterprises. As mentioned earlier, if money is idle, it will not produce time value. Similarly, after a period of development, an enterprise will definitely earn more money than it originally invested. Idle money will not increase in value, and may depreciate with inflation. Therefore, enterprises must make good use of this money. The best way is to find a good investment project to invest it and let it enter the production and circulation activities to add value. The investment of an enterprise needs to occupy part of the enterprise's funds. Whether this part of the funds should be occupied or not, and how long it can be occupied, are all problems that need to be determined by decision makers in a scientific way. Because, although an investment has benefits, it is also accompanied by risks. If the decision is wrong, it will bring great disaster to the enterprise. Some enterprises go bankrupt or their life span is shortened because of indiscriminate investment and blind investment. There are many examples of this. The following is an analysis of the influence of the time value of money on the investment decision-making of enterprises and how enterprises make investment decisions.

The main motive of enterprise investment is to obtain investment income, and the investment decision is to choose the scheme with small investment income from multiple alternatives. How to make investment decisions, there are generally two decision-making methods, one is non-discount method, which does not consider the time value of money, and the other is discount method, which considers the influence of time value of money.

Payback period method and accounting rate of return method belong to non-discount method. Payback period method is a method to judge whether an investment is feasible according to the time required to recover the investment. It compares the calculated payback period with the planned payback period. If the former is greater than the latter, the scheme is feasible, otherwise it is not feasible, and the shorter the payback period, the better. Accounting rate of return method is a method to compare the accounting rate of return of investment projects with the capital cost of investment, and then judge whether the investment is feasible. If the accounting rate of return is greater than the cost of capital, the scheme is feasible, otherwise it is not feasible, and the greater the accounting rate of return, the better.

Discount methods include present value method, net present value method, profit index method and internal rate of return method. The present value method is to compare the total present value converted from the net cash flow of the project from production to scrapping with the total investment. If it is greater than, it is feasible, otherwise it is not feasible, and the greater the difference, the better. The net present value method is a variant of the present value method, which is judged directly according to the positive and negative of the net present value (net present value = total present value-total investment). If the net present value is positive, the scheme is feasible, and the bigger the better, otherwise it is not feasible. The law of profit index is based on the size of profit index, but it is feasible to be larger than 1, and the bigger the better, otherwise it is not feasible. The internal rate of return method compares the internal rate of return with the cost of capital. The former is greater than the latter, and the scheme is feasible, otherwise it is not feasible. The bigger the IRR, the better. Enterprises can make decisions by any of the above methods when making investments. For example, there is a case in which the inputs and benefits of three schemes A, B and C are as follows:

1, using payback period method:

pa = 1+(20000- 1 1800)/ 13240 = 1.62

Pb = 2+(9000- 1200-6000)/6000 = 2.3

PC = 2+( 12000-4600-4600)/4600 = 2.6 1

Scheme A has the shortest payback period, so scheme A should be selected.

2, accounting rate of return method:

ra =( 1800+3240)/(2 * 20000)= 12.6%

Rb =(- 1800+3000+3000)/(3 * 9000)= 15 . 6%

Rc=(600*3)/(3* 12000)=5%

Scheme b has the highest accounting rate of return, so scheme b should be chosen.

3. Use the present value method: assume that the capital cost is 10%.

PVa = 1 1800/( 1+ 10%)+ 13240/( 1+ 10%)( 1+ 10%)= 2 1669

PVb = 1200/( 1+ 10%)+6000/( 1+ 10%)( 1+ 10%)+6000/( 1+ 10%)( 1+ 10%)。

PVC = 4600 *( 1/( 1+ 10%)+ 1/( 1+ 10%)( 1+ 10%)+ 1/( 1+ 10%)( 1%)。

The present value of scheme A is the largest, so scheme A should be chosen.

4, using the net present value method:

NPVa = PVa-I = 2 1669-20000 = 1669

NPVb = PV b-I = 10557-9000 = 1557

NPVc = PVc-I = 1 1440- 12000 =-560

Scheme A has the largest net present value, so scheme A should be selected.

5, using profit index method:

PIa = 2 1669/20000 = 1.08

PIb = 10557/9000 = 1. 17

PIc = 1 1440/ 12000 = 0.95

Scheme b has the largest profit index, so scheme b should be selected.

6, using the internal rate of return method:

ra = 16.05% & gt； 10% scheme is feasible.

Rb = 15.24% & gt； 10% scheme is feasible.

Rc = 8.67 & lt 10% scheme is not feasible.

The above six methods get two results, which is more accurate? The payback period method is easy to understand, which can roughly reflect the investment recovery rate and is simple in calculation. However, it exaggerates the rate of return on investment and ignores the income after the payback period, which is easy to cause serious retrogression. Because many large-scale investment projects, which are vital to the long-term survival of enterprises, can not bring investment income in the first few years, and the payback period is taken as a parameter by decision makers, which often leads enterprises to give priority to quick success and give up long-term successful projects. The most important defect is that it ignores the time value and thinks that the value of funds at different time points is the same. It is not in line with financial principles to directly substitute funds at different time points into relevant calculations. The accounting rate of return method is also easy to understand and the calculation is not complicated, but it does not adopt the concept of cash flow, and like the payback period method, it does not consider the time value of money and regards the cash flow in the first year as having the same value as the cash flow in the last year, so its decision may be incorrect. Various methods under the discount method consider the time value, and discount the annual net cash flow of investment projects according to the cost of capital (discount rate), which makes the funds at different time points comparable and truly reflects the different effects of cash inflows on investment profitability in different periods. The most basic concept of financial management is the time value of money. When using the time value of money, the future cost and income of the project should be expressed by the present value. If the present value of income is greater than the present value of cost, the project should be accepted, otherwise it should be rejected. Therefore, when we make investment decisions, we should adopt the discount method considering the time value of money, with the discount method as the main method and the non-discount method as the supplement.

In addition, the results of present value method, net present value method and profit index method are sometimes different, because the absolute number and relative number of investment income are different with different investment amount. When evaluating several independent schemes, we often use the profit index method to rank the investment efficiency of independent schemes, which makes up for the shortcoming that the net present value method can not evaluate the advantages and disadvantages of several independent schemes. In the selection of mutually exclusive schemes, the net present value should prevail.

From the above discussion, we can clearly see that the time value of money is an important economic concept, which will have an important impact on both individual investment decisions and enterprise investment decisions. When making investment decisions, we must consider the time value of money, attach importance to it and make scientific investment decisions. Of course, an enterprise's investment decision should consider not only the time value of money, but also some factors of the project itself and government policies, which should be considered accordingly.

Third, the application of time value of money in enterprise management

1, Application in Enterprise Inventory Management

On the one hand, enterprises will occupy more funds because of the increase in sales, on the other hand, enterprises will also make the inventory unsalable and overstocked because of the slow inventory turnover, which will affect the capital turnover and reduce the economic benefits of enterprises. If the operator wants to deal with the overstocked inventory, when weighing the gains and losses of inventory price reduction, he should consider the following two aspects from the time value of money: First, when forecasting the overstocked inventory, he should calculate it with compound interest instead of simple interest. If the enterprise has a backlog of 6,543,800 yuan, and the monthly interest rate is 6%, the interest on the backlog of inventory for one year is:

Simple interest calculation I1=100 * 4 *1.8% = 7.2 (ten thousand yuan)

Compound interest calculation I2 =100 * [(1+1.8%) 4-l] = 73967 (ten thousand yuan).

Second, the monetary expenditure of custody fees should also be calculated according to compound interest. As the above example, the custody fee is 2,000 yuan at the end of each quarter, and the annual expenditure is:

F = 2000 * [(1+1.8%) 4-l]/1.8% = 8219 (yuan)

2. Application in enterprise sales installment payment.

If the enterprise adopts installment sales, there is also the time value of money. For example, the customer pays 400 yuan 160 yuan for each bicycle in one lump sum, and then pays 20 yuan at the beginning of each month with a monthly interest rate of 0.6%. The purchase price of this installment payment is equivalent to cash payment:

P = 20 * (1+0.6%) * [1-(1+0.6%)-12]/0.6%+160 = 392.29 (Yuan

The time value of installment payment is 7.7 1 yuan less than that of lump sum payment, which is equivalent to the waiting period of each bicycle:

N=7.7 1/400/0.02%=96 (days)

If the bicycle can't be sold within 96 days, the economic benefit might as well be sold by stages.

3. Application in enterprise equipment investment

Enterprises are faced with the choice of whether to continue to use old equipment or buy new equipment when making fixed assets renewal decisions. Generally speaking, equipment update has not changed the production capacity of enterprises, nor has it increased the cash inflow of enterprises. Therefore, a better analysis method is to compare the annual cost of continuous use and renewal, and the lower one is a good plan. At this time, we should consider the time value of money. For example, an enterprise has an old equipment, and the engineers and technicians require it to be updated, and the old equipment can still be used for 6 years. The final residual value is 200 yuan, the current realized value is 600 yuan and the annual operating cost is 700 yuan. The new equipment can be used for 10 years, with the final residual value of 300 yuan and the realized value of 2400 yuan. The annual operating cost is 400 yuan, and the annual interest rate is 15%, regardless of the time value of money.

Average annual cost of old equipment =(600+700*6-200)/6=767 (yuan)

Average annual cost of new equipment = (2400+400 *10-300)/10 = 610 (yuan)

It can be seen that the average annual cost of new equipment is low, so buy new equipment. If you consider the time value of money:

Average annual cost of second-hand equipment

= [600+700 * ( 1-( 1+ 15%)- 16)/ 15%-200 * ( 1+ 15%)

Average annual cost of new equipment

= 2400/[ 1-( 1+ 15%)- 10]/ 15%+400-300/[( 1+ 15%).

According to the above calculation, the average annual cost of using old equipment is low, so it is not suitable for updating equipment.

In addition to the above aspects, we should also fully consider the time value of money in the aspects of consignment, receivable and payable, leasing consignment, dividend distribution, enterprise merger and acquisition, depreciation of fixed assets, foreign economic and trade, etc., so as to maximize the economic benefits of funds in the turnover process.