Time Value Essay Example for Free

age take account messvasOne of the most important concepts about parsimony and investing is the conviction order of silver. It can be apply to comp are investiture alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. This means bullion paid out or veritable in the hereafter is non equivalent to money paid out or motherd straight off because inflation erodes moneys buying power. Basic onlyy, the power of time is on a persons side and the premise that specie in hand today is more valuable than the same inwardness in the future due to its capability of straighten outing amuse. There are three factors affecting how a lot an enthronization go forth grow time, money, and interest point. Time judge of bills is a concept that is very important in financial management. It affects transmission line, personal, and government finance (Harvey, 2012) Within this paper we will discuss the definition of Time Value of Money and identifies the importance of financial managers understanding the concept. Time, Money and Interest Rates Time has an important impact on the future value of money. Time is referred to as N, or number, and signifies the number of propagation something happens to your money. The earlier an item-by-item invests, the more time their investment has to compound interest and increase in value.The do of time on the value of money need to be taken into account when assessing investments. Investments (Money) with interest ball club compounding frequently will yield higher(prenominal) returns. The higher the interest ramble, the more money an individual will earn. However, and individual must understand an investment with a higher interest arrange broadly speaking has a greater risk. Risk is the uncertainty the yield on an investment will deviate from what is expected. Generally, set up and Future legal injury of Money 2 having a savings or investment plan with a fixed interest set out guarantees a specific return but can provide a mode respect risk.The last item to take into consideration with interest rates is ensuring the interest rate is higher than the rate of inflation. Inflation is the steady rise in the general level of prices of a market hoop of goods. If the average interest rates rise, the amount a person earns from this type of investment will not increase. Another consideration with interest rates is ensuring the interest rate is higher than the rate of inflation. Need for pecuniary Managers Anyone who manages finances in a compevery setting , deals with consumer finance or running their own business is a financial manager and needs to understand the concept of Time Value of Money.A financial managers job it to compare the cost and benefits of alternatives that occur at different times. This is done by restating money values through time in Time Value of Money calculations. These calculations estimate what emergence time will engender on money. For these professionals to make decisions that will assist a thickening in taking advantages of low interest rates or investing wisely a comprehensive noesis and understanding of the Time Value of Money is needed. Understanding this concept allows them to make better decisions.If they dont understand the concept then they could make an unfavorable decision resulting in loss of money for the client or their business (Time Value of Money, 2013) Future Value and limn Value As an investor, you cannot control the rate of return on an investment. The actual yield is de callined by the market as a whole, in the form of people buying and selling the investments at relegate and Future Price of Money 3 a price that, coupled with the investments payouts, determines the yield. There are two fundamental formulas used to calculate the time value of money the future value and the empower value formulas.Theyre fundamentally the same formulas, but rearranged to solve for different values . The future value formula can answer the question, how much money will I have if I invest a certain amount now, at a given rate of return? The formula is FV=PV*(1+R)N, where FV is the future value (how much youll have later), PV is the re rescue value (how much youll have now), R is the periodic rate of return or the percentage that your money will grow in all(prenominal) unit period of time. N is the number of unit periods of time in the overall time span. The succeeding(a) are examples of the calculation of future values a) Solve for FV $150,537.19 invested for seven long time at an interest rate of 5% will yield a future value of $211,820. 94. FV = 150,537. 19 (1+ . 05)7 = 150,537. 19 (1. 05) 7 = 150,537. 19 (1. 40710042265625) = $211,820. 94 b) Solve for FV $237,891. 22 invested for eight long time at an interest rate of 3% will yield a future value of $301. 353. 48. FV = 237,891. 22 (1 + . 03) 8 = 237,891. 22 (1. 03) 8 = 237,891. 22 (1. 266770081387616) = $301,353. 48 c) So lve for FV $320,891. 12 invested for 10 years at an interest rate of 11% will yield a future value of $911,144. 98. FV = 320,891. 12 (1 + . 11) 10 = 320,891. 12(1. 11) 10 = 320,891. 12 (2. 839420986069016) = $911,144.98 d) Solve for FV $520,520. 22 invested for 13 years at an interest rate of 13% will yield a future value of $2,549,513.82. FV = 520,520. 22 (1 + . 13) 13 = 520,520. 22(1. 13) 13 = 520,520. 22(4. 898011103216606) = $2,549,513. 82 The present value formula is based on the same fundamental formula, but its solved for the PV term and assumes you will turn in the FV amount. The present value formula can Present and Future Price of Money 4 answer the question, how much money would I have to invest now in order to have X dollars at a specific future date? .That formula is PV = FV/(1 + R) n where all the terms mean the same thing, except that R in this formula is typically referred to as the discounted rate, because its purpose is to lower a future amount of money to show wh at it is worth to you now (McCracken, 2014). The following are examples of the calculation of present value a) If you receive a dividend of $562,126. 17 in 7 years at an interest rate of 5%. You initial investment would have been $399,492. 57. PV = 562,126. 17/(1 + . 05) 7 = 562,126. 17 / (1. 05) 7 = 562,126. 17/1. 40710042265625 = $299,492. 57 b) If you receive a dividend of $225,003. 21 in 6 years at an interest rate of 6%. Your initial investment would have been $158,618.38. PV = 225,003. 21/(1 + . 06) 6 = 225,003. 21/(1. 06) 6 = 225,003. 21/1. 418519112256 = $158,618. 38 c) If you receive a dividend of $321,567. 35 in 5 years at an interest rate of 18%. Your initial investment would have been $140,560. 05. PV = 321,567. 35/(1 + . 18) 5 = $140,560. 05/(1. 18) 5 = 321,567. 35/2. 2877577568 = $140,560. 05 d) If your receive a dividend of $63,000. 05 in 12 years at an interest rate of 5%. Your initial investment would have been $35,080. 75. PV = 63,000. 05/(1 + . 05) 12 = 63,000. 05 / (1. 05) 12 = 63,000. 05/1. 795856326022129 = $35,080. 79 Annuity Present and Future Price of Money 5.An rente is a series of identical payments occurring at correspond time intervals. When the payments appear at the end of each time period, the annuity is said to be an ordinary annuity or an annuity in arrears. Present value calculations allow us to determine the amount of the recurring payments in an ordinary annuity if we know the other components present value, interest rate, and the length of the annuity. Present value calculations involve the compounding of interest. This means that any interest earned is invested and will earn interest at the same rate as the principal. So, you earn interest on your interest.The compounding of interest can be very significant when the interest rate and the number of years are sizable. The present value of an annuity, represented by a series of equal payments, receipts or rents involve five components (1) Present Value (2) Amount of each id entical cash payments (3) Time between the identical cash payments (4) Number of periods that the payments will occur, length of the annuity and, (5) Interest rate or target rate used for discounting the series of payments. If you have any 4 of the 5 components, you have the information you need to calculate the unknown component. Calculations of Annuity.Suppose you are to receive a stream of annual payments of $325,891. 12 every year for 12 years starting at the end of this year. The interest rate is 6%. What is the present value of these 12 payments. PVA = PMT ( 1- (1 /(1 + r) n )) /r = 325,891. 22(1- (1/(1 + . 06) 12))/. 06 = 325,891. 22(1- (1/(1 . 06) 12))/. 06 Present and Future Price of Money 6 = 325,891. 22(1 (1/20121964718355))/. 06 = 325,891. 22(1-. 496969363577001)/. 06 = 325,891. 22. 503030636422999/. 06 = 325,891. 22 x 8. 383843940383317 = $2,732,221. 13 is the present value of the 12 payments. Suppose you are to receive a payment of $437,891.24 at the end of each yea r for five years. You are depositing these payments in a bank account that pays 15% interest. Given these five payments and this interest rate, how much will be in your bank account in five years? FVA = PMT ((1 + r) n 1) /r = 437,891. 24 ((1 + . 15) 5 1)/. 15 = 437,891. 24 ((1. 15) 5 1)/. 15 = 437,891. 24 (2. 0113571875 -1) /. 15 = 437,891. 24 1. 0113571875/. 15 = 437,897. 24 x 6. 74238125 = $2,952,429. 69 will be in your bank account at the end of 5 years. Conclusion Present Value and Future calculations wait to be a simple way to compare money at different periods of time.Utilizing the future value calculation a person is able to determine the estimated future value of investments based on periodic, uniform payments and constant interest rate. It ca also be used to calculate the future of loans payments. Time Value Money is a basic tool in finance that is used every day. Utilizing this concept can help individuals and companies weight all the options so the best decision can be made to Present and Future Price of Money 7 prosper in the future. Understanding and having the knowledge about saving and investing is very important to our generation, especially with the very bleak look of social security.References Biger, N. (2008). Explanation of present values and net present values. Harvey, C. R. (2012). Time Value of Money. Retrieved January 16, 2013, from The Free Dictionary http//financial-dictionary. thefreedictionary. com/Time+value+of+money McCracken, M. , (n. d. ) The time value of money. Retrieved January 2014 from http//www. teachmefinance. com/timevalueofmoney. html Present and Future Price of Money 8 Time Value of Money Overview. (n. d. ) Retrieved January 17, 2013, from University of West Florida http//uwf. edu/rconstand/fin4424web/T2-TimeValue/T2-TimeValuePO1. htm Present and Future Price of Money.