Time Value of Money Application
Introduction
Money is an essential part of our lives; therefore, it is imperative to understand how factors such as time, discount, and interest rates affect its value. For example, understanding the effective rate on a business loan, the mortgage payment in a real estate transaction, or the true return on an investment depends on understanding the time value of money (Block & Hirt, 2005). This paper discusses the time value of money with specific attention to three areas: present value, future value, and future-value annuity. The paper further discusses discount and interest rates.
Time Value of Money
The time value of money concept implies that if you have a preference of collecting certain amount of money today or at a future date from now, the money you should anticipate at a future date from now should be in greater amount than the collectable amount today. This concept also means that dollar collected today is valued more than future dollar because one can begin to earn interest immediately. Most people would prefer to receive $10,000 now than defer payment into the future. The time value of money demonstrates that it is better to have money now rather than later.
Present Value
The present value of money is an amount today that is comparable to a future payment, or succession of payments, that has been concise at certain interest rate. If one were to collect $ 50,000 right now, the present value would of course be $50,000 in that the present value is what the investment gives if to spend the amount today. If $50,000 were collected in a year, the present value of that amount would not be $50,000 because that amount is not hand at th ...