The idea of the time value of money is important because of the fundamental assertion that one would rather have X number of dollars now, than later. If the money is taken later a value of X+i is preferred. This concept is applied to all situations where someone uses the monies of another for some duration of time and is expected to return the money. This is used in loans, savings accounts, investments, annuities, etc... I apply the time value of money in my personal life in many ways. I calculated out a couple payment options for the new vehicle I purchased this year to see which one cost the least in the end. I also had to figure out how much I had to put in my sons’ college savings fund so it would be worth a certain amount when they turn 18. That was just this year. This concept is widely used in important areas of our personal finances.
How might you use the Time Value of Money concept as a quantitative reasoning tool in business?
In business you need to take out loans to expand or in times of shortage. It is important to understand the risk of those loans and exactly how much needs to be paid and when. Sometimes businesses give loans to their customers. At my company we sell a product that is so expensive that companies sometimes have to obtain different loans from different banks to purchase different sections of an airplane. So we give some loans to our customers so they can afford our product. We have to be able to calculate the rates we charge so that we don’t over burden the customer and so we don’t end up with money that isn’t worth what it would of been the day we sold the plane. Then it would be like giving a discount.
The formula to calculate the value of $1 put into savings today is fv = pv*((1+i)^n). The variables...