Time Value of Money
TIME VALUE OF MONEY
Time value of money is useful in making informed business decisions. For example the "net present value method" can be used to help decide the best alternative among multiple alternative uses of a firm or personal financial resources. By discounting various alternatives to their "present value" one can compare the alternatives. Time value of money can also answer such questions as what one's investment will be worth at a certain point of time in the future, assuming a certain interest rate. Time value of money can also be used to compute such useful information as car, mortgage and other loan payments. Another use of time value of money in accounting is reporting of certain long-term assets and liabilities.
Time value of money is based on the principle of compound interest. Each time there is a compounding period the new principal is increased by the interest from the previous period.
Converting Before Using the Tables When using the tables, you may need to convert if, for example, in a lump sum situation there are more than one compounding periods in a year. Or you may need to convert (to monthly compounding) if, for example, you are working with an annuity situation involving a car loan that involves monthly rather than annual periodic payments.
You often need to convert whether it is a lump sum or an annuity situation. Do the following conversions before using the tables. See some of the examples which follow these notes.
For semi-annual compounding [or for deposits every six months in an annuity], take the annual interest rate and divide it by 2. Take the number of years and multiply by 2.
For quarterly compounding [or for quarterly deposits in an annuity] take the annual interest rate and divide it by 4. Take the number of years and multiply by 4.
For monthly compounding [or for monthly deposits in an annuity] take the annual interest rate and divide it by 12. Take the
Time value of money is useful in making informed business decisions. For example the "net present value method" can be used to help decide the best alternative among multiple alternative uses of a firm or personal financial resources. By discounting various alternatives to their "present value" one can compare the alternatives. Time value of money can also answer such questions as what one's investment will be worth at a certain point of time in the future, assuming a certain interest rate. Time value of money can also be used to compute such useful information as car, mortgage and other loan payments. Another use of time value of money in accounting is reporting of certain long-term assets and liabilities.
Time value of money is based on the principle of compound interest. Each time there is a compounding period the new principal is increased by the interest from the previous period.
Converting Before Using the Tables When using the tables, you may need to convert if, for example, in a lump sum situation there are more than one compounding periods in a year. Or you may need to convert (to monthly compounding) if, for example, you are working with an annuity situation involving a car loan that involves monthly rather than annual periodic payments.
You often need to convert whether it is a lump sum or an annuity situation. Do the following conversions before using the tables. See some of the examples which follow these notes.
For semi-annual compounding [or for deposits every six months in an annuity], take the annual interest rate and divide it by 2. Take the number of years and multiply by 2.
For quarterly compounding [or for quarterly deposits in an annuity] take the annual interest rate and divide it by 4. Take the number of years and multiply by 4.
For monthly compounding [or for monthly deposits in an annuity] take the annual interest rate and divide it by 12. Take the