Time Value of Money
Resource: Ch. 12, 12-A, & 12-C of Health Care Finance
Part I: Complete the following table by inserting your responses to the questions. Cite any sources you use.
|Define the time value of money. |The time value of money is the value of money figuring in a given amount of interest earned over a given | | |amount of time. The time value of money is the central concept in finance theory. The value of a dollar today| | |is more than the value of a dollar in the future: thus the “present value” terminology. Furthermore, the | | |further in the future the receipt of your dollar occurs, the less it is worth. | |Provide a real-world example for the time |For example, $100 of today's money invested for one year in a stock in McDonalds can earn 5% interest will be| |value of money. |worth $105 after one year. Therefore, $100 paid now or $105 paid exactly one year from now both have the same| | |value to the recipient who assumes 5% interest; using time value of money terminology, $100 invested for one | | |year at 5% interest has a future value of $105. | |Why is time such an important factor in |Because money deposited or invested can earn more money over time, time can allow the value of money to | |financial matters? |increase. Time also has the effect of eroding the purchasing value of money through inflation. You can use | | |certain financial calculations, described later, to estimate what effect time might have on your money. | |How would you use the time...