Time Value of Money

Essay by jvisnaw2University, Master'sA, January 2009

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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 will briefly address the impact of discount and interest rates, present value, future value, opportunity cost and the impact interest has on money being borrowed.

Time Value of MoneyPresent value is a current amount of money that is equivalent to a future payment or series of payments that has been discounted by an appropriate interest rate. The future amount can be a single sum that will be received at the end of the last period, as a series of equally spaced payments (an annuity), or both.

Since money has time value, "the present value of a promised future amount is worth less the longer you have to wait to receive it." (Gallager&Andrew, 1996)Future ValueFuture value is the amount of money that an investment with a fixed, compounded interest rate will grow into by some future date. The investment can be a single sum deposited at the beginning of the first period, a series of equally spaced payments (an annuity), or both. Since money has time value, it is logically expected that the future value will be greater than the present value. "The difference between the two depends on the number of compounding periods involved and the going interest rate." (Gallager&Andrew, 1996) An annuity is a number of repeated payments or receipts in the same amount. Researchers propose that the annuity values happen at...