This website uses cookies to ensure you have the best experience. Learn more

Time Value Of Money (Tmv) Paper

881 words - 4 pages

IntroductionIn financial management, one of the most important concepts is the Time Value of Money (TVM). Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding TVM is crucial to making good buying and borrowing decisions. This paper will examine the effect of annuities and other investments on TVM problems and investment outcomes.TVM and Opportunity CostThe essence of the TVM concept is that today's dollars are worth more than the expectation of dollars that will be received in the future (GetObjects.com, 2006). TVM is premised on the economic principle of opportunity cost. If a business or individual spends money on one activity instead of another, must consider the cost of the lost opportunity to carry out the activity not chosen when calculating the relative benefit of the chosen activity. When applied to investment, it only makes sense that the borrower should compensate the lender for forgoing other opportunities to use their money. That compensation, while taking several forms, is generally described as interest (Investopedia.com, 2006).Present and Future Value of MoneyPrinceton University's Richard Spies expressed the time value of money in its simplest terms in saying that, "A dollar today is worth more than a dollar tomorrow" (Moseley, C., 1998). While putting cash in a box and burying it in the ground may keep it safe, its value starts to diminish immediately because of inflation. In order to protect an investment from the effects of inflation, an investor needs to purchase an asset whose future value will be greater than its present value plus the effect of inflation. The rate of return before inflation, also known as the nominal rate, less the rate of inflation is the real rate of return on the investment. So, if the real return is positive, the future value of an investor's money will be greater than its present value. There are several ways to accomplish the necessary income to overcome inflation, such as interest paying investments.InterestInterest on money borrowed can be calculated in several ways. Simple interest is computed once in a period on the principal borrowed. Compound interest is computed over several periods on the principal plus the interest from the previous periods (GetObjects.com, 2006).Albert Einstein called compound interest the "8th Wonder of the World." (Woodward. D., 2006). Compound interest has the power to turn a relatively small investment into a large return. For relatively small interest rates, the "Rule of 72" demonstrates how quickly compound interest can multiply an investment. The rule simply states that an investment will double in 72/r years, given an interest rate of r compounded annually (Brealey, Myers, & Marcus, 2003, p.79). It assumes that the investment can earn a guaranteed rate of interest. Of course, if one is on...

Find Another Essay On Time Value of Money (TMV) Paper

Time Value of Money Essay

816 words - 3 pages TMV is an important concept in the financial industry. The time value of money concept is based on the idea that money received now will be worth more than money received at a later time. This is so due to the fact that money in the hand now can be invested immediately and can earn interest as opposed to money that is received in the future, which has earned no interest. The contents of this paper will explain the how annuities affect TVM

Time Value of Money Essay

902 words - 4 pages , "Remember that time is money." The fundamental tools of finance consist of the following: the time value of money (TMV), present value, future value, opportunity costs, annuities and the rule of '72."Investors hear lots of talk about compounding, the process used to find the future value of a cash flow, but much less about discounting, the process used to find the present value of a cash flow." (McCaffery, 2000) Simply put, cash received at

Time Value of Money

1127 words - 5 pages Time Value of Money: OverviewTime value of money is the concept that "an amount of money in one's possession is worth more than that same amount of money promised in the future." (Garrison, 2006) This paper will explain how annuities affect time value of money (TVM) and investment outcomes. "Today money can be invested to earn interest and therefore will be worth more in the future." (Brealey, Myers, & Marcus, 2004) In addition, this paper

Time Value of Money - 880 words

880 words - 4 pages In financial management, one of the most important concepts is the Time Value of Money (TVM). Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding TVM is crucial to making good buying and borrowing decisions. This paper will examine the effect of annuities and other investments on TVM problems and investment outcomes.TVM and Opportunity CostThe essence of the TVM concept is that

Time Value of Money - 768 words

768 words - 3 pages Annuities and Time Value of MoneyThe purpose of this paper is give definitions of financial terms related to annuities and time value of money and how they are related to investments. Knowing the financial terms and how they relate to monetary values and the futures of those values is vital to the success of any investor. Having a deeper understanding of key financial terms related to investing can create a optimum baseline for

Time Value Of Money

1722 words - 7 pages Time Value of Money Time Value of Money To make itself as valuable as possible to stock holders; an enterprise must choose the best combination of decisions on investment, financing and dividends. In any economy in which firms have the time preference, the time value of money is an important concept. Stockholders will pay more for an investment that promises returns over years 1 to 5 than they will pay for an investment that promises

Time Value Of Money

1239 words - 5 pages Time Value of Money The time value of money serves as the foundation of finance. The fact that a dollar today is worth more than a dollar in the future is the basis for investments and business growth. The future value of a dollar is based on the present dollar amount, interest rate and time period involved. Financial calculators and tables can assist in computing the future and present values, which eases the pain of the mathematically

Time Value of Money - 753 words

753 words - 3 pages In financial management, one of the most important concepts is the Time Value of Money (TVM). Time Value of Money concepts helps a manager or investors understand the benefits and the future cash flow to help justify the initial cost of the project or investment. Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding of TVM is crucial to making good buying decisions. To recognize how

Time Value of Money - 749 words

749 words - 3 pages In financial management, one of the most important concepts is the Time Value of Money (TVM). Time Value of Money concepts helps a manager or investors understand the benefits and the future cash flow to help justify the initial cost of the project or investment. Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding of TVM is crucial to making good buying decisions. To recognize how

Time Value of Money - 888 words

888 words - 4 pages Businesses need to understand how their money, investments, or loans are a benefit or detriment to them over time. To gain a better understanding, one should contemplate the time value of money (TVM). According to Benshoof (2005), "The time value of money quantifies the value of money over time. The time value of money depends upon the rate of return or interest rate that can be earned by investing the current money on hand" (p. 74). To

Time Value Of Money

1022 words - 4 pages AbstractThe initial steps on the way to understanding the connection between the value of dollars today and that of dollars in the future is by looking at how funds invested will grow over time. This understanding will allow a person to answer such questions as; How much should be invested today to produce a specified future sum of money?TIME VALUE OF MONEYGenerally, borrowing money is not free, unless it is a small amount for lunch from a

Similar Essays

Time Value Of Money Paper

866 words - 3 pages Time value of money ("TVM") is defined as the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also often referred to as "present discounted value" (Answers Corporation, 2006). TVM concepts help people like managers or

Time Value Of Money (Tvm) Paper

723 words - 3 pages a set amount disbursed or received for example loan payments, pensions, leases, and certain sports contracts can also be considered an annuity. But for the purpose of this paper I will use the investment vehicle definition of annuity.In summary, "Time Value of Money can be a positive entity if used correctly by a borrower or investor. Opportunity costs have to be weighed very carefully before making the decision. There may be circumstances that

Time Value Of Money Application Paper

1168 words - 5 pages IntroductionAn important concept in finance is time value of money (TVM), which means that cash received at different times has different values. A dollar today is worth more than the same dollar tomorrow. TVM concepts help a manager or investor understand the benefits and the future cash flow to help the manager or investor if the future benefits will justify the initial cost of the project or investment. In this paper, I will identify and

Time Value Of Money (Tvm) Paper

1344 words - 6 pages Wikipedia defines the Time Value of Money (TVM) as "the premise that an investor prefers a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal."This paper will look at how annuities affect TVM problems and investment outcomes. Specifically, the following areas will be explored:•Interest rates and compounding•Present value (of a future payment received)•Future value (of an