TIME VALUE OF MONEY
Contact our law firm for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Time Value of Money (TVM) is one of the most important fiancial concepts for strategic business planning, as it asserts that a sum of money available today is inherently worth more than the identical sum promised at a future date. This fundamental asymmetry exists primarily because money in hand can be invested, earning a return, or interest, over time. This earning capacity, known as the opportunity cost of capital, means that money today possesses the potential for future growth through the power of compounding. Conversely, the future value must be discounted back to the present to account for this lost earning potential and the erosion of purchasing power due to inflation. Time Value of Money calculations, which use formulas involving present value, future value, interest rate (or discount rate), and the number of periods, provide the quantitative framework for all rational financial decision-making, making it a primary factor in many corporate financial decisions.
For corporations, the time value of money governs major financial decisions such as capital budgeting, debt valuation, and, crucially, tax planning. Every investment decision, whether acquiring a new asset or launching a multi-year project, relies on discounting projected future cash flows back to their Present Value (PV) to determine a Net Present Value (NPV). If the NPV is positive, the project adds value to the firm. This reliance on PV ensures that the timing of cash flows is accurately reflected; a profitable project that delivers returns quickly is financially superior to one with identical nominal returns delivered slowly. This financial prudence, maximizing the present value of future earnings, is what drives a corporation’s aggressive strategy toward minimizing or postponing current liabilities, particularly tax obligations.
This core principle of maximizing present value directly translates into the significance of corporate tax deferrals. A tax deferral is not a tax exemption; it is merely a postponement of the date on which a tax liability must be paid. However, the time lapse between the year an income-generating transaction occurs and the year the tax on that income is actually settled creates a temporary, interest-free loan from the government to the corporation. From a Time Value of Money perspective, delaying a $1 million tax payment for five years, assuming a 5% cost of capital, means the corporation saves the difference between the $1 million liability and its discounted present value. The corporation can then invest that $1 million for five years, compounding returns on the pre-tax amount.
Therefore, the longer a corporation can legally defer a tax liability, the greater the financial benefit, reinforcing the old finance adage: a dollar saved in taxes today is worth more than a dollar saved in taxes tomorrow. Common deferral mechanisms, such as accelerated depreciation (using tax rules to deduct asset costs faster than the asset physically declines) or carrying forward business losses, are utilized by corporations not to eliminate taxes, but to manage the timing of tax payments [more on corporate tax deferrals]. The resulting benefit, retaining and investing cash that would otherwise have gone to the government, allows the corporation to leverage the power of compounding interest, ultimately boosting net present value, increasing shareholder wealth, and providing additional capital for immediate reinvestment and growth.
At Neufeld Legal, we have the experience and insight to assist you in structuring your start-up business enterprise as a corporation and developing the appropriate contracts to advance its commercial pursuits. Contact our law firm to incorporate a new corporation or address legal matters pertaining to your start-up business enterprise at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
