Time Value of Money

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• Published : January 5, 2013

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Time Value of Money

Time value of money is an amount of money available today can be safely invested to accumulate to a larger amount in the future.

Present value- an amount of money available today.
Future amount-amount receivable/payable at a future date

Relationship Between Present Values and Present Values
The difference between present value and future amount is the interest that is included in the future amount. It depends on two factors: 1. Rate of interest at which present value increases
2. Length of time over which interest accumulates
The basic concept of Time Value of Money:
* A PV is always less than its future amount.
* A future amount is always greater than a present value
* A dollar available today is always worth more than a dollar that does not become available until a future date * A dollar available at a future date is always worth less than a dollar that is available today

Future Value Concepts
Future Value of a Single amount
The future value of a single amount is the value at a future date of a given amount invested assuming compound interest. Formula:

FV= p X (1+i)n
Where:
FV= future value of a single amount
P= principal (present value)
i= interest
n= number of periods

Future Value of an Annuity
The future value of an annuity is the sum of all the payments (receipts) plus the accumulated compound interest on them. In computing the future value of an annuity, it is necessary to know (1) the interest rate, (2) the number of compounding periods, and (3) the amount of periodic payments or receipts. Formula:

FVoa= PMT [((1+i)n-1)/i)
Where:
FVoa = Future Value of an Ordinary Annuity
PMT = Amount of each payment
i = Interest Rate Per Period
n = Number of Periods
This measures how much you would have in the future given a specified rate of return/ discount rate.

Present Value Concepts
Present Value is an amount today that is equivalent to a future payment, or series of...