View the video “The Time Value of Money”. This video will walk you through present and...

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Finance

View the video “The Time Value of Money”. This video will walkyou through present and future values of money. How are theconcepts of PV and FV important when we talk about your personalfinancial management of money? What is the importance of creating abudget? How can you make changes in your personal routine in orderto stick to a budget—what challenges might you face?

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The time value of money TVM is an important concept to investors because a dollar on hand today is worth more than a dollar promised in the future The dollar on hand today can be used to invest and earn interest or capital gains A dollar promised in the future is actually worth less than a dollar today because of inflation Provided money can earn interest this core principle of finance holds that any amount of money is worth more the sooner it is received At the most basic level the time value of money demonstrates that all things being equal it is better to have money now rather than later The time value of money sounds like one of those boring economic concepts that a small business owner doesnt have time for but that would be wrong Future value and present value are monetary concepts that a business owner uses every day whether he realizes it or not The idea is simple Money in your pocket today is worth more than the same amount received several years in the future The difference is the effect of inflation and the risk that you may not actually receive the money you expect in the future What Is Future Value Future value is the amount of money that an original investment will grow to be over time at a specific compounded rate of interest In simpler terms an investment of 1000 today in an account paying 4 percent interest will be worth 1217 in five years Thats an example of the time value of money Example of Future Value How is this concept of time value useful in managerial decisionmaking Suppose you have an old piece of machinery that you would like to replace but a replacement will cost 50000 You dont want to borrow the money so you decide to save enough each month for three years to pay cash How much will you need to save each month to reach the goal of 50000 Lets assume the current interest rate for savings is 4 percent A future value calculator shows that 36 payments of 645 per month will yield 50051 in three years If you work this monthly payment into your companys budget you can replace the obsolete equipment in three years paying cash and not taking on additional debt What Is Present Value Present value is a See Answer

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