Time Value of Money (TVM) Paper
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Time Value of Money (TVM) Paper
Prepare a 700-1,050-word paper in which you explain how annuities affect TVM problems and investment outcomes. In your paper, be sure to address the impact of the following items on TVM:
Interest Rates and Compounding
Present Value (of a future payment received)
Future Value (of an investment)
Opportunity cost
Annuities and the Rule of 72
Be sure to support your position using information from the assigned text(s) reading and other sources. Be sure to properly cite all sources.
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Response discusses about Time Value of Money (TVM)
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Prepare a 700-1,050-word paper in which you explain how annuities affect TVM problems and investment outcomes. In your paper, be sure to address the impact of the following items on TVM:
Interest Rates and Compounding
Present Value (of a future payment received)
Future Value (of an investment)
Opportunity cost
Annuities and the Rule of 72
Present value
Present value is an important concept of the financial management. This is concept derived from the time value of money. The basic idea of time value of money is that a dollar today is worth more than a dollar tomorrow. (finance professor, 2009)
The investor has time preference of money because he can reinvest the funds, which are received early and can earn additional money Present value, is the future value being discounted by the rate of interest. This is because of reasons discussed before.
This concept is important because the major financial objective of the organization "Wealth maximization" is based on present value concept. Wealth maximization is preferable to profit maximization as it is based on cash flow which is unambiguous and considers time value of money and risk. Illustration of present value:
P=present value, F= Future value r= rate of interest n=duration
P=F/(1+r)^n
Find the present value of $2400 to be received three years from now with a 4% discount rate
=2400/(1+4%)^3
=$2133.59 is the answer
Future value of investment and compounding
The future value of a sum of money invested at interest rate i for one ...
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