Search

# Time value of money - Research Paper Example

Summary
Name: Tutor: Course: Date: University: Question 1 Introduction In economics and finance, money is said to have a time value.  This in essence means that a unit of money e.g. a dollar that people currently possess is preferred over a unit that they expect to receive in the future…

## Extract of sample"Time value of money"

Download file to see previous pages gger amount in the days to come. The renowned fact that money possesses a time value implies that time value of that money must be put into account when making decisions to do with finance.  This is done by restating values of money through time with what is called Calculations of Time Value of Money.  These calculations are applied so as to shift monetary unit values of through the given time period.  The calculations can be used to state future monetary flows in present value terms and also to restate today’s value amounts into future monetary values. These calculations are by far the most powerful tool that is available for making business and financial decisions. These values may be used to restate cash flows in such a way as to make them comparable in the process of making financial decisions. The present value of money puts into account that fact that cash always loses value over time due to inflation as well as opportunity cost. The reason the topic of present value of money is very important in finance is because its calculation forms a basis for all decisions that managers make. Calculation of present values is very important in making many financial decisions that face all individuals and managers in various types of firms.  This procedure allows many financial computations in relation to the interest earning, returns upon investments gains, capital budgeting processes of decision, predicaments relating loan, insurance programming predicaments, and many other business asset buying or decisions in relation investment.  These computations also grant the basis for part of the most commonly used valuation models as well as concepts applied in today’s finance.  Failure to discount makes ventures that yield returns in the future appear to be more valuable than they really are.(Rosen, H.S 2005 pp. 241)Through calculating the net present value, firms are able to make accurate estimates on the returns to expect from various investments they choose to undertake. This is through calculating returns on investments. Firms are also in a better position to make reasonable and accurate budgets since they are under no illusion about their actual present or future monetary value. The net present value is also very important in dealing with loans related issues that may arise. The finance manager of a company will be in a position to know the amount of loan that the firm can afford to repay comfortably. This is very important because the company will avoid having too large loans which may be difficult to repay and thus it will remain financially stable. Finally, calculation of net present value is very useful in solving insurance programming problems of a company. Question 2 Future Value(FV) = Present Value(PV) ?( 1 + Interest Rate(R) )T , where T is the number of periods or years a) Present value = \$ 15,000, Interest Rate = 7%, Time = 5years Therefore,Future Value = 15,000 ? (1 + 0.07)5 = \$21,038.28 b) Present value = \$ 19,500,Interest Rate = 4%,time = 3years Future Value = 19,500?(1+0.04)3 = \$ 21,934.8 c) Present value = \$ ...Download file to see next pagesRead More
Cite this document
• APA
• MLA
• CHICAGO
(“Time value of money Research Paper Example | Topics and Well Written Essays - 1250 words”, n.d.)
(Time Value of Money Research Paper Example | Topics and Well Written Essays - 1250 Words)
https://studentshare.org/family-consumer-science/1419294-time-value-of-money.
“Time Value of Money Research Paper Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/family-consumer-science/1419294-time-value-of-money.
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Time value of money
...? Time Value of Money Introduction Time value concept is an important concept in a financial world. It gives us clarity about as to how we should go ahead comparing two different investment avenues in terms of present value. It will not be possible to compare straight two securities giving different returns in two different time frames; looking at absolute values, it becomes almost impossible to arrive at conclusion, which one is more beneficial in terms of financial return to us. The comparison and decision becomes possible if those cash flows or future streams are converted to its present values applying appropriate discounting factor for that time periods. (Biger, N. 2008) While applying this concept, it is required to take... after...
3 Pages(750 words)Research Paper
Time Value of Money
...?Introduction The objective of this paper is to get an understanding of the concept of the time value of money. We first study the two important concepts in the area: Present value and the Future Value and its importance to the subject of corporate finance. We then look at some questions which calculate the present value of the future cash flows and the future value of present cash investments. 1. The concept of time value of money is critical to the world of Finance and is very often the first subject that is taught in a Corporate Finance class. It is based on the simple premise that “A penny in hand today is worth more than a penny in hand tomorrow”. This is on the basis of assumption that the money in hand today can be invested... in...
4 Pages(1000 words)Essay
Time Value of MOney
...?Time Value of Money The situation that a client of the company is facing is whether to buy a fixed income security i.e. bond, which will pay \$ 1000000 a year from today. The detailed features of the bond, whether it is a coupon paying bond or a zero coupon bond is not known. However, Time Value of Money analysis needs to be conducted in order to find out what payment should be made for the bond now in order to get back \$ 1000000 after one year. However, there are significant other factors that need to be considered while conjuring up to the present value of the bond. Before calculating the discount rate and...
3 Pages(750 words)Research Paper
The Time Value of Money
...The Time Value of Money What is Time Value of Money To understand time value of money, suppose that you are offered two options. You can take \$ 10000 today or \$10000 five years from now. Which one should you choose Many of us would accept the first option since it will provide us with the \$ 10000 today and we humans, being impatient would not want to wait for 3 years for this \$ 10000. Although, our decision is correct in financial terms, what we fail to understand is that the \$ 10000 received today will not be equal to \$ 10000 received five years from now because the \$ 10000 today can...
4 Pages(1000 words)Essay
Time Value of Money
...Time Value of Money Annuities are a series of equal payments that are made in return of a future lump sum amount. A fine example of an annuity wouldbe of a mortgage loan that is usually taken in order to pay off a loan for some property. These are equal payments whose sum equals the value of the future value of the payment. Time value of money concept forms the basis of this annuity concept (Gordon, 1999). To understand the concept better, one must understand the concept of opportunity costs. Opportunity costs are the benefit that a person sacrifices by using money in a particular way....
3 Pages(750 words)Essay
Time Value of Money Paper
...TIME VALUE OF MONEY The concept of time value of money is based on the fact that if you have money and you hold it, it would be worth more than some payment you expect to receive. This is due to interest earned on the money that has been held. If you have to receive \$1000 a year from now, then the application of time value of money applies that would be the present value of the same payment reduced by the discount factor. Time value of money is one of the most important factors in...
4 Pages(1000 words)Research Paper
Time Value of Money Calculations
...Time Value of Money Introduction The creation of added value is the main objective of investing in projects. Updating the server population may benefit the IT department and by extension the organization in some way. However, the cost of doing so may outweigh this benefit and so may not create added value for the company. It therefore means that the project must be evaluated to determine its profitability. In order to determine whether or not a project is beneficial or whether one project is more beneficial than another a number of project evaluation techniques are available for use in making decisions. Project Evaluation Techniques Capital budgeting decisions are based on an evaluation of the cash flows expected from investing... the annual...
3 Pages(750 words)Assignment
Time value of money
...TIME VALUE OF MONEY Time value of money is a term that measures the increase or decrease in the value of money with respect to time. The buying powerassociated with certain amount of money; do change as the time passes and multiple factors such as inflation, exchange rates, interest rate and other fluctuations economic conditions come into play. Two factors are central in this concept; present value and future value of money (Homer and Leibowitz, 269-276). One of the important financial decisions that...
1 Pages(250 words)Essay
Time Value of Money
...Time Value of Money al Affiliation: Question Time value of money is the consideration of the change in value of a given amount of money over a given period of time. This is because there are certain factors within the economy that create a state where a given sum of money, say \$1,000, cannot purchase the same amount of items presently, as it could 5 or 10 years ago. This concept is used to analyse investment in terms of the value added to the initial investment over a given period of time. Question 2 An ordinary annuity is a sequence or...
3 Pages(750 words)Coursework
Time Value of Money _
...Time Value of Money Affiliation “Take heed if your are buying or selling annuities”, is an article that provides an imformatic look at the ever changing regulatory landscape, and its relation to annuity products. It also elaborates on the responsibilities a fiduciary has when it comes to selling these products to a client. The article discusses the criteria, legal factors and issues an attorney has to consider as a trust fiduciary on annuity investments in the US. Various federal and state rules have been trying to narrow down the sale of equity indexed annuities to suitable investors. It is important that lawyers should note the key issues in annuity sale and investment. The relationship between a trustee and the beneficiaries... that the...
3 Pages(750 words)Essay
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Let us find you another Research Paper on topic Time value of money for FREE!
+16312120006