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Time Value of Money: Meaning, Benefits, Concept, Formula, Examples, and When to Use


14 June 2024
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With IDR 200 thousand in the past you could shop for more goods than now. This situation is an example of the time value of money.

This situation occurs because the value of the money you have now may change or even decrease in the future. One way to overcome these changes is with long-term investment.

Therefore, in this article you must learn in full about the time value of money from various concepts to calculation formulas.

Understanding Time Value of Money

Time value of money is a financial concept where the current value of money may decrease in the future. This reduction in value is caused by time, fluctuations in bank interest, and inflation.

Investopedia illustrates this concept with the following case example. If you are offered IDR 5 million now or in two years, it would be better to accept the money now.

Even though the amount of Rp. 5 million will not change in the next two years, the value and goods it can buy will decrease. This is caused by the factors mentioned above.

Therefore, by receiving IDR 5 million now, you can increase its value by investing. That way, you will receive additional money from the investment.

Benefits of Time Value of Money

Maybe you think that time value of money is a bad thing, but that's not always the case. Here are some ways to take advantage of this:

  • Become a guide for determining the investment amount.
  • Knowing when you should use money and for what.
  • Knowing what investment instruments will be profitable in the future.
  • Helping you choose the right savings product, for example deposits.
  • Take into account the money you will have in the future with a financial plan.
  • Regarding business, you can calculate production and innovation budgets.
  • Calculate your profit opportunities in the future.

Time Value of Money concept

Summarized from MasterClass, based on changes in time and ways of looking at the value of money, there are three concepts of time value of money, namely:

Present value

Present value is the amount of money you need to invest now to get a certain profit in the future. Briefly the current value of money. This amount also serves as a benchmark for the amount of interest you will receive after investing.

Future value

Future value is a prediction of the amount of profit you will get based on a certain interest rate and duration. Briefly the future value of money. For example, based on present value, you invest IDR 100 million. By calculating high interest rates, you will get greater profits/future value.

Annuities

An annuity is additional income that you receive consistently over a certain period of time. For example, if you own a boarding house business, every month you will receive an annuity in the form of rent.

Time Value of Money Formula and Examples

To calculate the time value of money, you can calculate it based on each concept. Beforehand, you must understand the following terms:

  • FV = future value/future value of money
  • PV = present value/current value of money
  • r = interest rate
  • n = time period

After understanding the terms, here are the formulas and examples of calculations, citing BankRate:

Present value (PV) calculation formula and example

The present value formula is PV = FV / (1 + r)ⁿ.

Example of PV calculation: You have a savings target of IDR 25,000,000 within 3 years. You decide to create a deposit account with an interest rate of 10% annually. Based on the formula above, the calculation is:

PV = 25,000,000 / (1 + 10%)3

PV = 25,000,000 / 1.331

PV or money you have to prepare now = IDR 18,782,870

Formula and examples of future value (FV) calculations

The formula is FV = PV x (1 + r)ⁿ.

Example of calculating future value: if you save a deposit in a bank of IDR 15,000,000 with an interest rate of 10% annually. You have a plan to keep it for 3 years.

First year FV: 15,000,000 x (1+0.10) = 15,000,000 x 1.10 = IDR 16,500,000

Second year FV: 16,500,000 x 1.10 = Rp. 18,150,000

Third year FV: 18,150,000 x 1.10 = IDR 19,965,000

With the calculations above, it can be concluded that the total profit you will get in three years is IDR 4,965,000.

When should Time Value of Money calculations be used?

We recommend that you use time value of money calculations in the following situations:

  • When you are considering whether to buy or rent a house, and the amount needed between the two.
  • When calculating the amount of insurance premium you want to take and the investment amount.
  • When starting an investment, including choosing an instrument, the initial investment amount, and the investment period.
  • When considering buying a car, motorbike or other valuable items.
  • When considering paying debt/credit or investment first with an annual bonus.
  • When your company wants to acquire a smaller company.
  • When your company wants to buy new equipment for production.

By understanding the time value of money, you can estimate the benefits of the money you have now if invested correctly.

Want to learn more about the time value of money and how to use it for future profits?


Join our short program and learn from the experts by clicking here now!

RELATED ARTICLE
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investment credit that can help wider business expansion
27 June 2024

Doing business can be started by using investment credit services. In general, investment credit is a service that helps finance businesses both small and large scale.

This type of credit is an alternative type of bank credit, but is still officially supervised by banks in Indonesia.

Basically, investment credit is a government program that aims to develop the economy both in the region and in Indonesia. Providing investment credit to entrepreneurs can have an impact on creating job opportunities so that it can help reduce unemployment.

In general, investment credit seems quite profitable for the country and its business people, right?

Interested in applying for investment credit for business expansion? Understand more about investment credit first through this article!

Definition of Investment Credit

Investment credit is debt given to customers to expand their business. The debt repayment system can also be chosen based on a term agreement between customers who have businesses and the lender.

In Indonesia, the tenors given by banks are quite varied but generally 10-15 years. However, if you cannot pay it off within that time period, there is a 4 year deadline.

This type of credit is used to buy necessities or finance needs when building a business. Apart from that, investment credit can be applied for for various types of businesses, small and large scale.

Investment Credit Function

In general, the function of investment credit is to provide business capital for both individual businesses and institutions. The purpose of investment credit is provided so that business owners can develop their business in accordance with predetermined achievements.

In the financial sphere, investment credit is useful for moving the wheels of the country's economy and improving it. With the capital assistance provided to business owners, many businesses can develop.

It doesn't stop there, business development in the regions can have an impact on creating more job opportunities, thereby helping the government reduce unemployment.

Characteristics of Investment Credit

After understanding what investment credit is, of course there is a difference between this type of credit and others. The following are characteristics of healthy and official investment credit for you to consider:

Supervised by the Central Bank

For your information, investment credit is a government program so activities are supervised by the central bank. The central bank in Indonesia is Bank Indonesia with the function of supervising investment credit activities.

It doesn't stop there, the central bank's task is also to provide capital and assist business development in line with the function of credit.

Classified as a Government Program

As we know, investment credit is a government program supervised by the central bank. The large benefits provided make investment credit a target for parties participating in various government business programs.

Productive

Investment credit is productive. This is because the credit provided can be used to purchase inventory for business continuity and also business production costs. An example of increasing productivity is by adding tools or improvements.

With this, of course the business capital provided can encourage movement in the business's finances.

Example of Investment Credit

Investment credit is indeed interesting for those of you who have a business, either an individual or an institution. Apart from having expansion benefits, you also help the regional or government economy as long as you make payments on time.

However, what can investment credit references be used for? The following is an example of investment credit that you can consider when you want to apply!

Procurement of Business Equipment Inventory

For businesses that offer products, once they have their own factory, investment credit can be used. One of the things that can be done with investment credit facilities is purchasing business inventory.

If it is a factory, an example is the purchase of production machines. The purchase of business inventory equipment could be a component covered by the investment credit provider bank.

Building Renovation

Already have a business building, but need to renovate it to make it more viable? Investment credit can also provide costs for renovating buildings used for your business.

Examples of business buildings that can be renovated are head offices, factories or warehouses which are owned by individual businesses or institutions.

Purchase of New Buildings for Business

Have an adequate business building, but during expansion do you need a new building for production? Investment credit can help you to buy a new building for your production site.

Building a factory requires a lot of money, so investment credit can be an official financial service that can help in expanding your business.

This investment credit service provided by the government is indeed profitable for business people, both small and large scale. However, because applying for credit also has various requirements, make sure before applying you know all the requirements.

Apart from the financial matters that investment credit can help with in business expansion, you also need to equip yourself with knowledge before expanding. Want to deepen your business knowledge in the fields of supply chain, resources and marketing but don't have much time?

You can choose prasmul-eli which has several short program options.

For you business people who want to return to studying various sciences, Prasmul-eli now provides a variety of short program options with a learning duration of only 1-3 days. The program also presents facilitators who are experts in their fields so you can gain new business insights and tricks.
What are you waiting for, contact Prasmul-Eli to find out more about the program via this link!

Banner-Article-Juni-No.8.jpg
Time Value of Money: Meaning, Benefits, Concept, Formula, Examples, and When to Use
14 June 2024

With IDR 200 thousand in the past you could shop for more goods than now. This situation is an example of the time value of money.

This situation occurs because the value of the money you have now may change or even decrease in the future. One way to overcome these changes is with long-term investment.

Therefore, in this article you must learn in full about the time value of money from various concepts to calculation formulas.

Understanding Time Value of Money

Time value of money is a financial concept where the current value of money may decrease in the future. This reduction in value is caused by time, fluctuations in bank interest, and inflation.

Investopedia illustrates this concept with the following case example. If you are offered IDR 5 million now or in two years, it would be better to accept the money now.

Even though the amount of Rp. 5 million will not change in the next two years, the value and goods it can buy will decrease. This is caused by the factors mentioned above.

Therefore, by receiving IDR 5 million now, you can increase its value by investing. That way, you will receive additional money from the investment.

Benefits of Time Value of Money

Maybe you think that time value of money is a bad thing, but that's not always the case. Here are some ways to take advantage of this:

  • Become a guide for determining the investment amount.
  • Knowing when you should use money and for what.
  • Knowing what investment instruments will be profitable in the future.
  • Helping you choose the right savings product, for example deposits.
  • Take into account the money you will have in the future with a financial plan.
  • Regarding business, you can calculate production and innovation budgets.
  • Calculate your profit opportunities in the future.

Time Value of Money concept

Summarized from MasterClass, based on changes in time and ways of looking at the value of money, there are three concepts of time value of money, namely:

Present value

Present value is the amount of money you need to invest now to get a certain profit in the future. Briefly the current value of money. This amount also serves as a benchmark for the amount of interest you will receive after investing.

Future value

Future value is a prediction of the amount of profit you will get based on a certain interest rate and duration. Briefly the future value of money. For example, based on present value, you invest IDR 100 million. By calculating high interest rates, you will get greater profits/future value.

Annuities

An annuity is additional income that you receive consistently over a certain period of time. For example, if you own a boarding house business, every month you will receive an annuity in the form of rent.

Time Value of Money Formula and Examples

To calculate the time value of money, you can calculate it based on each concept. Beforehand, you must understand the following terms:

  • FV = future value/future value of money
  • PV = present value/current value of money
  • r = interest rate
  • n = time period

After understanding the terms, here are the formulas and examples of calculations, citing BankRate:

Present value (PV) calculation formula and example

The present value formula is PV = FV / (1 + r)ⁿ.

Example of PV calculation: You have a savings target of IDR 25,000,000 within 3 years. You decide to create a deposit account with an interest rate of 10% annually. Based on the formula above, the calculation is:

PV = 25,000,000 / (1 + 10%)3

PV = 25,000,000 / 1.331

PV or money you have to prepare now = IDR 18,782,870

Formula and examples of future value (FV) calculations

The formula is FV = PV x (1 + r)ⁿ.

Example of calculating future value: if you save a deposit in a bank of IDR 15,000,000 with an interest rate of 10% annually. You have a plan to keep it for 3 years.

First year FV: 15,000,000 x (1+0.10) = 15,000,000 x 1.10 = IDR 16,500,000

Second year FV: 16,500,000 x 1.10 = Rp. 18,150,000

Third year FV: 18,150,000 x 1.10 = IDR 19,965,000

With the calculations above, it can be concluded that the total profit you will get in three years is IDR 4,965,000.

When should Time Value of Money calculations be used?

We recommend that you use time value of money calculations in the following situations:

  • When you are considering whether to buy or rent a house, and the amount needed between the two.
  • When calculating the amount of insurance premium you want to take and the investment amount.
  • When starting an investment, including choosing an instrument, the initial investment amount, and the investment period.
  • When considering buying a car, motorbike or other valuable items.
  • When considering paying debt/credit or investment first with an annual bonus.
  • When your company wants to acquire a smaller company.
  • When your company wants to buy new equipment for production.

By understanding the time value of money, you can estimate the benefits of the money you have now if invested correctly.

Want to learn more about the time value of money and how to use it for future profits?


Join our short program and learn from the experts by clicking here now!

Banner-Article-Juni-No.2.jpg
5 Examples of Financial Reports and the Right Way to Make Them
07 June 2024

Financial reports are an important component in a company. To help you understand the company's financial condition, we have prepared various examples of financial reports.

However, before knowing the various examples, we will also explain in detail how to make the following financial reports.

How to Make Financial Reports

According to Databox, a financial report must be accurate and complete. You can use these financial reports to show the company's performance to old investors and attract new investors.

Here are the right ways and steps to make financial reports:

Start with these three main data

If your company or business has been running for more than three years, add sales information for the last three years.

Meanwhile, if your company or business has just started or is less than three years old, include all sales information while the business is running.

The sales information in question is the selling price, number of products sold, and operational cost calculations. This information can help you understand how much profit you will make based on the number of sales.

You can also use this variety of information to create sales targets or predictions (sales forecast) for the next few months or 1 year.

Write expenses in detail

Sales forecasts are useful for helping you calculate the expenses you have incurred and will incur. Detailed expenses contain fixed costs (certain expenses such as rent, employee salaries, etc.) and variable costs (proportional expenses, for example marketing and promotion costs).

You can also add tax charges in detailed expense information, such as VAT and PBB.

Create a clear cash flow

By using sales information, sales forecasts, and expense calculations, you can create company cash flow.

If your company is still a startup or new, make a cash flow calculation for the next 6-12 months.

Make profit/profit predictions

Profit predictions are quite easy to make. You just have to calculate it using the following formula:

Income - expenses - tax burden

For example:

Company expenses in 1 year: IDR 125 million

Company income in 1 year: IDR 175 million

Tax burden in 1 year: IDR 17.5 million

So, the calculation is: IDR 175 million - IDR 125 million - IDR 17.5 million = IDR 32.5 million.

However, keep in mind that these numbers are predictions. Depending on market conditions, sales figures, and the size of your operational costs, the numbers can show profits or losses.

Ensure inventory data is complete

Include what is in your inventory and the costs incurred to purchase and store it.

Make sure all data is accurate and complete, because this data will also be part of your company's operational calculations. If your business or company operates in the field of multifunctional products, investors will ask for this information.

They want to know even your processes for managing assets and inventory for continued production.

Add the break even point

According to the BBC, the break-even point is the point where total income is equal to total expenditure. In simple terms, the break even point indicates that the company has not made a profit, but has not experienced a loss either.

Break-even analysis can help you identify expenses that will potentially be needed later. This can help you set more reasonable targets, price products more accurately, and avoid making careless decisions.

Examples of Financial Reports

If you need a clearer example of a financial report, here we explain the five types, quoted from Investopedia:

Example of a simple financial report

Source: merdekakeuangan.net

For small businesses and startups, you can follow this simple financial report example. This report must contain important elements related to your business finances. Make sure you include all types of expenses and no matter how small.

Example of financial report: Comprehensive income/profit

Source: Pintu.co.id

Financial reports related to comprehensive income and profit will show changes in the net finances of your business or company in a certain period.

This financial report will also be shorter and focus on your company's net profit or finances.

Example of a financial report: Cash flow

Source: OCBC.id

Cash flow is important to ensure whether your company or business is running according to plan. In this example of a financial report, you must list in full and in detail all operational costs, investments, assets and funding for your company.

Example of a financial report: Profit and loss

Source: Detik.com

This example of a financial report is most often used because it can show the income and expenses of your company or business as a whole.

This report will provide a factual overview of your company's financial condition. Typically, this report will contain:

  • Business expenses (employee salaries, rent, depreciation, etc.)
  • Operating revenues
  • Outside business expenses (loan interest, late fees, etc.)
  • Corporate/business income tax

From all these figures, you can find out your company's net profit.

Example of a financial report: Changes in equity

Source: bigalpha.id

Financial reports related to changes in investor equity must include in detail the total equity from one period to another. In this report, investors will be able to find out data about:

  • Initial equity
  • The company's final income
  • Dividend

These are various examples of financial reports and how to prepare them which can definitely help you find out more about the performance of a company or business.

Want to learn more about proper financial reports and how to prepare them?

Join our class and learn how to prepare the best financial reports and get examples.

Join our short program by clicking here now!