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# Time value of money & effect of annuities on TVM

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I am doing an assignment on Time value of money and how annuities affect TVM problems and investment outcomes.

I also need information on the following 1) Interests rates and compounding 2) present value of future payment received 3) future value of investment opportunity cost and annuities and the rule of 72.

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#### Solution Preview

TIME VALUE OF MONEY

Interest rates, compounding and future value

(Book IM Pandey)
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

Simple interest is interest on the principle amount while compound interest is when your principle and any earned interest earned interest. The interest rate is applied to the original principle and any accumulated interest.

Compound interest is critical to investment growth. With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.

Future Value = Present Value (1+r)^n
r= interest rate
n= time period
Thus there is a time preference for money. Time preference for money is an individual's preference for possession of a given amount of money now, rather than the same amount at some future time.
Three reasons may be attributed to the individual's time preference for money:
? risk
? preference for consumption
? investment opportunities
Future value of today's Rs 100 @10% per annum after one year will be Rs. 110/-
Thus compounding technique is use to find the future value of the investment

Future value of Annuity

WE can also use the compounding technique to find out the future value of annuity in the following manner:

Example:
What's the future value in 10 years of \$1,000 payments received at the beginning of each year for the next 10 years? A 5.625% interest rate is assumed. ...

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