Time Value of Money

Time value of money (TMV) is the basis of discounted cash flow analysis in finance. Time value of money has to do with interest rate, compound interest, and the concepts of time and risk with regard to money and cash flows. The differences in the dollars used now for investment spending versus cash flows later is the current value of the dollar at the moment in time. Yes, a one-time payment on investment may not return any cash flows but if invested over time, the potential may pay off. The underlying principle of time value of money is that the value of $1 that you have in your hand today is greater than a dollar you will receive in the future.

Issue A:

For the last 19 years, Mary has been depositing $500 in her savings account , which has earned 5% per year, compounded annually and is expected to continue paying that amount. Mary will make one more $500 deposit one year from today. If Mary closes the account right after she makes the last deposit, how much will this account be worth at that time?

Calculating compound Interest:

If the deposit was made annually then:

Formula: f = d[(1 + i)^n - 1] / i

F = future value (?)

Deposit = 500

Interest rate = .05

N= 20(Assuming the exact year after 19th deposit)

Mary has been working at the university for 25 years, with an excellent record of service. As a result, the board wants to reward her with a bonus to her retirement package. They are offering her $75,000 a year for 20 years, starting one year from her retirement date and each year for 19 years after that date. Mary would prefer a one-time payment the day after she retires. What would this amount be if the appropriate interest rate is 7%?

If Mary decides to take a lump sum she will get

$75000 x 20 = 1500,000

Interest is calculated at 7% for 20 years

Amount = p[1+ (r/100)]^20

1500,000 (1+.07) ^20

1500,00 (1.07) ^20

Benshoof, M. (2005). THE TIME VALUE OF MONEY. Professional Builder, 70(3), 74. Retrieved from...