Time Value of Money

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Time value of money, is exactly how it sounds.  Time can determine the value of your money in aspects of Present Value (PV) and Future Value (FV).  Present value is what your money is worth at the present point in time that you acquire it.  Future value is what your money will be worth if you accrue interest over time.  Equations for both are as follows.  FV= PV (1 + i) ^n, PV= FV (1+i) ^ -n.  Examples of both; you get $15,000 now or $15,000 in three years.  If you take the $15k now and put it away to gain interest at .056 (5.6%) the equation would follow as FV = $15,000 (1+.065)^1; interest accrued in first year would be $840 in the first year, bringing your FV=$15,840 after the first year. Second year; FV = $15,840 (1+.056) ^1; interest for second year is $887.04, bring your FV=$16,727.04, etc.... If you decided to take the money in three years, it would still be worth $15,000 seeing as no interest was gained on the money.  PV works in reverse order. If you take the $15k in three years, it's present value wouldn't be $15k, the following equation shows why; PV = $15,000 (1+.056)^ -1, so at the end of the two year wait with interest you could have made, PV= $14,160, this continues in the same form just in reverse.  So with time the value of money can change whether in the present or future.

References:

"Foundation of Financial Management" South University Online Lecture. Retrieved Jan.14th, 2011 from http://myeclassonline.com/re/DotNextLaunch.asp?courseid=4769451&userid=3511638&sessionid=2250615fb3&tabid=rc/eRJIF2T37mY2f45OqgzoznpJq6EQXcgS2OH7Miic=&macid=J+b0t7uQs/6VcpI2nF75/mxfUKTsvfi2W8kan2B0cSJ4ro4bF519Tt5mhp2PvMMdyFYLTnO/Nzu0yy7ruV14nrZjO8gYwKR5pDIKOu9o2DZUv24rstcr/UpThw5UUK6nqdSHvv0UXk/1hoR09gl2Id5tg1BHBk373P6ksFVhXN0=

“Understanding The Time Value Of Money” Investopedia, Retrieved Jan. 20th 2011 from

http://www.investopedia.com/articles/03/082703.asp?viewed=1&wwparam=1295541705

How are compounding and discounting related?...
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