In this paper, Team C will discuss the concept of the time value of money and the importance of this concept in business. Also, we will provide a demonstration of the use of the formula used to calculate the present and future values of money to get the present value of $100 using different periods of time and interest rates.
Time Value of Money
In the world of business, it is essential to know what TVM represents and how it helps make better choices in how we spend our money. TVM is also known as Time Value of money which is a given amount of interest earned in a period of time (Wikipedia, 2011). Each member in group “C” will use 100 as our present value and we will choose an interest rate and period. Time value of money concept is used to determine present and future values of money. “The time value of money refers to the relationship between time, money, and the rate of interest.” (Letsche, 2011). The formula consist of four components FV = Future Value, PV = Present Value, i = the interestrate per period and n= the number of compounding periods (TeachMeFinance.com). In business, TVM is used to evaluate expected returns on investments and monitoring the company’s cash flow. “However, understanding the time value of money is also very important for you as an self-employed business person to make sure you are able to realize your spending, purchasing and retirement goals.” (Loughran, 2011). On a personal level, individuals can use TVM to calculate interest that will be paid on mortgages, car payments and individual loans. Knowing how your money can work for you is important to personal financial success. When one considers the time value of money it is important to understand that “a dollar can be invested and earn interest over time” (Myers, 2011). Time value of money is a very important concept in the role of investing money. This would be because, “it explains the concept of compound returns, which causes investments to grow exponentially...
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