Time Value of Money Concepts
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Describe the four time value of money concepts - present value, present value of an annuity, future value, and future value of annuity. Describe the characteristics of each concept and give an example of how each one would be used.
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Solution Summary
This solution first gives a comprehensive explanation of the concept of Time Value of Money. It then provides you with information on the characteristics of present value and a link to where information may be found on the other sub concepts i.e. present value of an annuity, future value and future value of annuity. Examples of each and how they can be used is then given to conclude the solution.
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Hello Student,
In order to answer this question, the first thing that you need to do is briefly explain the concept of time value of money; then state the sub-concepts and their characteristics and give an example of how each one can be used.
Time value of money (TVM) is a very important concept in financial management. But, why is it important? It is a concept that helps us to realise that the value of a dollar to us today can be worth more in the future if invested wisely. Also, all things being equal, this concept helps help us to realise too that it is better to have money now than in the future. Since what a $100.00 bill may value now, will not be worth the same (it will value less) in the future, even though its the same $100.00 bill. The time value of money concept has many other uses including it can be used to help to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities.
Note the following excerpt to help you with your explanation of time value of money:
"TVM is based on the concept that a dollar that you have ...
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