Time value of money

Time value of money critique and how it applies to financial management

The title of this article is appropriate for the writing. Leimberg et al. (2000, p.1), enumerates on how the internal revenue code continually change the interests every month. The valuing process is always much detailed and together with frequent revision of interest rates monthly and the change of life interests after a decade. Financial practitioners have to be well versed with the ever-changing complex rules especially those related with the time value of money. To help us understand how and why interest rates change over a given period, the writer has expounded the valuation of various interest rates (Leimberg et al.,2000).

Valuation according to the writer depends on two major seemingly impossible scenarios (Leimberg et al., 2000, p.3). These cases are, the length of live of an individual controlling a life interest and the actual return on capital of an investment. According to Leimberg et al. (2000, p.3), a figure is always put during their creation though the two are always unknown. The above poses a big challenge to finance management because of the uncertainty of the future. The valuation of investment and life interests is often based in the present value of future payments. This from the writers’ point of view is the reason why there is uncertainty in the two unknowns. The reason of doing valuations is normally to assist determine the discount rate of an investment that characterize the interest under valuation. The discount rate according to the writer helps convert the values to the present .The only changing variable in a 1-year computation is the discount rate; this therefore makes it easier to carry out the computations.

According to Leimberg at al. (2000), making assumptions on how people frequently die is another form of valuing property. The writer is not clear on how probability can be used to ascertain mortality of different ages. It is however up to financial managers to formulate a workable guide to enforce section 7520, apiece which postulates how gifts, estates included are to be in line with the death assumptions. Moreover, this section is not clearly, as although it’s designed to conform with the valuation set in line with the date the gift was made or the date the decedent died, the use of a monthly discount rate is applied. Its therefore cumbersome and a prone to errors. The IRS publication of census figures and subsequent mortality assumptions, which are due to a decade update, are much inconsistent. This is because there is no building of the section 7520 case. The statistical figures of these census data are prone to errors and basing valuation solely on them could be imprudent for investors. This is because the interests might be biased. Thus, the writer attest to this by pointing out that there is a shortened life expectancy above ages 95,while the life expectancy in the new statistics in accordance to those below the age of 95 is higher contrary to the previous actuarial tables.

Financial management is the backbone of investment and asset valuation. This therefore calls for vivid understanding of the actuarial table of time value of money. According to Leimberg et al. (2000), financial practitioners need to understand not only what these actuarial tables represent but also their creation. In calculating the annuity, a procedure ought to have been advance to aid in exhaustive calculations. The summary of reminders on the enjoyment of property and life are in summary and grasping what is really happening after period lapse is not clear.

In conclusion, the paper did to a large extend explain various aspects of time value of money. Some work moreover needs to be done to link interest rates and annuity with section 7520 and to devise software to aid financial practitioners in computations.

References

Leimberg, S. R., Doyle, R. J., & Evans, D. B. (2000).How to compute the time value of money. The Practical Tax Lawyer, 14(4), 5-5-14). ProQuest Research Library.