Time Value of Money Paper

Essay by rlundayUniversity, Master's September 2010

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Time Value of Money Paper

University of Phoenix


Time Value of Money

It is important to understand the time money value (TMV) in relation to money. Time money value (TMV) is defined as the money of one's possession is worth more than that same amount of money today can be invested to earn interest, and therefore will be worth more in the future. This core principle of finance holds that provided money is worth more the sooner it is received time money value (TMV) can be used to compare investment alternatives and to solve problems involving leases, mortgages, savings, and loans. This paper will discuss the calculated present value and future value for single amounts. Secondly, discuss how the annuities and uneven streams of cash flow affect time money value. Finally, the paper will discuss the list of various financial applications, and explain the components of a discount/interest rate affect the time money value (Fabozzi, 2008).

Calculate Present Value and future Value for Single Amounts

Present value - Single Amount

Money has a time value and the present value is the amount the money is worth in the future, so the longer the wait, the less the value. "The concept of present value - a sum payable in the future is worth less today than the stated amount," (Block, 2004. p. 241). The present value is equal to the value of a future payment discounted by an interest rate. The formula that is used to calculate present value is: PV = FV x PVif or Present Value (PV) = Future Value (FV) X PVif (interest factor).

Future value - Single Amount

The future value is the opposite of the present value, "In determining the future value,