Nobody downloaded yet

Time Value of Money - Essay Example

Comments (0) Cite this document
Summary
Annuities are a series of equal payments that are made in return of a future lump sum amount. A fine example of an annuity would be 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…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER98.1% of users find it useful
Time Value of Money
Read TextPreview

Extract of sample "Time Value of Money"

Download file to see previous pages Therefore, to make a certain investment, the opportunity costs should be low (David, 1984).
Time value of money shares a direct relationship with the prevailing interests in a market. As the interest rates rise, the value of a dollar today will rise accordingly. When the interest rates follow the decreasing pattern, the value of money also sees a down sliding. This is because the interest rates play a very important part in determining the future value of a lump sum or the present value of a future lump sum; it is dependent on the interest rate. Therefore, they are directly related to each other.
There are many other aspects which are related to the time value of money. The future value of an amount of money can also be calculated keeping in mind the time value of money. Making it simpler, the future value of a dollar is the dollar or any other amount that it earns with the help of an interest over a period of time (David, 1984). For example, if $1000 are invested today for an year at 5% interest rate, after an year it will give us $50 dollars and the total received would be $1050. However, if the same amount is invested in the long run for years, compounding will take place and at the end of second year, the interest will be earned on $105. This compounding will go on for the number of years the investment is made. If P is considered the principle amount of money that is invested, i is termed as the interest rate at that time, then the future value of a dollar would be given as P(1+i). When compounding for two years, the equation changes to P(1+i)(1+i) or,
FV=P (1+i)n
Where P is the principal amount, i is the interest rate and n is the periods for which the investment is made. With increasing interest rates, the future value also keep on increasing. With changing interest rates, the above formula would be applied separately for the different rates.

Present Value
The present value of a future investment can also be calculated keeping in mind the time value of money. The present value of a future investment is the current value of that payment that is to be received in the future. Discounting is the process that is employed in this case. This is the opposite of finding the future value of a present sum (Gary, 1978). Simply, it is calculated by dividing the future value with the same interest factor which was multiplied in the first case.
PV=FV/(1+i)n
Where FV is the future value, PV denotes present value, and (1+i)n is the interest factor. In finding out the present value, discounting is being done, therefore, this concept shares and inverse relationship with the time value of money. As the interest factor that determines the time value of money is divided, the value of the present value decreases resulting in the inverse relationship.

Opportunity Costs
Opportunity costs are the benefits that a person is giving away in spending the money in a certain kind of way. In other words, it is the benefit lost in choosing one alternative over another alternative. For this to be true, the opportunity costs should be really low for an alternative to be chosen. Higher the opportunity costs, lesser are the chances that the alternative may be chosen by a risk aversive personality. It can be termed as the basic relationship that exists between shortage and selection.

Rule of '72
Rule of '72 is a simple mathematical shortcut that is used in finance in order to find out when ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Time Value of Money Essay Example | Topics and Well Written Essays - 750 words”, n.d.)
Retrieved from https://studentshare.org/miscellaneous/1511338-time-value-of-money
(Time Value of Money Essay Example | Topics and Well Written Essays - 750 Words)
https://studentshare.org/miscellaneous/1511338-time-value-of-money.
“Time Value of Money Essay Example | Topics and Well Written Essays - 750 Words”, n.d. https://studentshare.org/miscellaneous/1511338-time-value-of-money.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Time Value of Money

Time value of money

...? Question Introduction In economics and finance, money is said to have a time value.  This in essence meansthat 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. The act of putting off the application of a unit of money implies they are postponing on consumption.  To convince people to postpone their consumption and invest or lend their money, they demand a return over time for their money. This return comes in the form of capital or interest gain.  This therefore means that, assuming annual returns are reinvested, an amount of...
5 Pages(1250 words)Research Paper

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 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
sponsored ads
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 Essay on topic Time Value of Money for FREE!

Contact Us