Preview

Time Value of Money, a Financial Management Concept

Satisfactory Essays
Open Document
Open Document
313 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Time Value of Money, a Financial Management Concept
Money is an essential part of everyday existence and in order to understand and handle money matters, financial managers must understand how factors such as time and discount interest rates affect value. Money has a time value associated with it and therefore, a dollar today is worth more than a dollar in the future (Block & Hirt, 2005). Today money can be invested to earn interest to create more cash later or decrease the value over time. This paper will explain various financial applications of the time value of money (TVM), and will explain the components of a discount interest rate.
Time Value of Money
The time value of money (TVM) is a financial management concept used in comparing investment alternatives, which facilitates problem solving with regard to loans, mortgages, leases, savings and annuities. TMV has two specific components, future value and present value. Each component can aid an investor in deciding whether to borrow money, buy a house, rent office space, save money or purchase an annuity. In addition to the primary components of future value and present value, TVM has other components such as interest (simple and compound) number of period (years) and payments.
Future value (FV) is determined by measuring the value of a face value amount that grows at certain percentage rate over a period of time. The formula for calculating future value is: FV=PV(1 + i)- using Block and Hirt’s (2005) example on page 240, chapter 9 the following would be true: An investor has $1000 and wants to know what that $1000 will be worth over the course of four years at an interest rate of 10% annually. The future value would be determined accordingly-
1st year $1,000 * 1.10= $1,100
2nd year $1,100*1.10=$1,210
3rd year $1,210 *1.10=$1,331
4th year$1,331 *

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Time Value of Money

    • 339 Words
    • 2 Pages

    |your financial benefit? |that would need to be made but I would try to pay more than that so I can pay if off faster and the interest |…

    • 339 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Time Value of Money

    • 705 Words
    • 3 Pages

    3. You want to save enough money to retire as a millionaire. If you could earn 10% with common stocks, how much would you have to set aside per year to have $1,000,000 when you are 65?…

    • 705 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Personal Finance

    • 372 Words
    • 2 Pages

    The value of time of money is the increase in an amount of money as result of interest earned. Money paid or received today I s worth more because it can be saved or invented and be more than money paid or received a year from now. You have risk in both sides. If you save your money and not be able to use it if you have an emergency. Or you risk not having money in the future if you don’t save. You are at a catch twenty two.…

    • 372 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Week 2 Assignment Mat 205

    • 360 Words
    • 2 Pages

    With the concept of this function, doubling time for an investment in use, a person can now safely and accurately predict the amount of time for growth in their investments. Within this global economic down turn, knowing and planning a financially secure future has become important for anyone in the general society. If more people were able to use this concept of doubling time for an investment, the…

    • 360 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Mba/540 Risk Analysis

    • 862 Words
    • 4 Pages

    The net present value is defined as the section suggested calculating the difference between the sum of the present values of the project 's future cash flows and the initial cost of the project (Ross, Westerfield, & Jaffe, 2005, p.144). The NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. NPV compares the value of a dollar today to the value of that same dollar in the…

    • 862 Words
    • 4 Pages
    Better Essays
  • Satisfactory Essays

    The analysis as per the proposal was done for 10years which is the expected economic life of the new factory. At the end of the economic life of the new factory, the cash flow includes the $14 million expected recovery from selling the factory. Time value of money is the concept that an dollar attain today will be valued more than the same dollar attained at a date in the future and can be computed by the following formula 1(1+r)^t.…

    • 588 Words
    • 6 Pages
    Satisfactory Essays
  • Satisfactory Essays

    The Time Value of Money

    • 264 Words
    • 1 Page

    Future value shows the amount of cash invested today and what it can grow to in the future. The present value shows the opposite, it determines what the expected cash flow from the future is worth in today’s dollars. When making financial decisions for the future of the business, these are a couple of the techniques used to help figure out what is the best option for a company.…

    • 264 Words
    • 1 Page
    Satisfactory Essays
  • Better Essays

    Time value of money is necessary when comparing possible business investments that have different costs, cash flows, and service lives. Processing a discounted cash flow technique such as the net present value method allows a business to consider the possible cash inflows, cash outflows and the necessary rate of return on the investment before it is considered feasible. When the required rate of return is calculated it changes the discount rate that is used when calculating the net present value of the investment (Edmonds, 2007).…

    • 1083 Words
    • 5 Pages
    Better Essays
  • Satisfactory Essays

    Future value measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return; it is the present value multiplied by the accumulation function. The value does not include corrections for inflation or other things that affect the real value of money in the future. It can also be described as the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. (http://www.investopedia.com/terms/f/futurevalue.asp) There…

    • 475 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Time Value of Money

    • 462 Words
    • 2 Pages

    | |value to the recipient who assumes 5% interest; using time value of money terminology, $100 invested for one |…

    • 462 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    How do you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How may you use TVM to create your own, or someone else’s, retirement plan?…

    • 486 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    J.J Reddick

    • 809 Words
    • 4 Pages

    Now, let’s use a simple Time Value of Money (TVM) question you may encounter in MyFinanceLab.…

    • 809 Words
    • 4 Pages
    Good Essays
  • Good Essays

    The future value of Home Depot is simply the principle time value of money that is calculated to estimate the demand for future payments demand over the risk free rate of interest. The rate of discount is nothing but the summation of time value of money as proposed by the appropriate rate of interest. This aims towards increasing the nominal value of future returns.…

    • 680 Words
    • 3 Pages
    Good Essays
  • Good Essays

    in the United States was $28,835. Five years earlier, the average price was $21,608. What was the annual…

    • 2648 Words
    • 38 Pages
    Good Essays
  • Good Essays

    REF Syllabus

    • 1006 Words
    • 5 Pages

    understanding of the basic tools of finance: discounting of cash flows and the time value…

    • 1006 Words
    • 5 Pages
    Good Essays