The Time Value of Money

Mary's' Retirement

FIN401

Cassandra Schumacher

Argosy University

The time value of money is simple, the longer you invest it, the more valuable a dollar becomes. "That is the concept of the time value of money in a nutshell. It makes sense. The longer you can let your money grow and compound, the more money you will have in the end. However, most people don’t understand the true power behind the time value of money. Too many people believe that if they leave their money in their investments for twice as long, they will end up with twice as much money. They are wrong. They forget about compound interest" (learningmarkets.com).

As for compound interest; "when you deposit money in a savings account or some other type of investment, it earns interest on the entire amount deposited. After the amount earns interest for that year, the interest that was paid adds onto the original principal balance. The following year, the amount in the account earns interest again. This time, the money earns interest on the higher balance, which pays you even more interest that year. In this way, your account balance keeps growing over time" (ehow.com)

And then there is present value; "terms such as present and future value of a sum of money apply to when investing in annuities and similar products. For example, when you have a stream of payments that you will receive over time, calculate the present value of those payments by using a discount rate. Calculate the future value of an amount of money based on how much it will earn in interest" (ehow.com)

Mary has been working for a university for almost 25 years and is now approaching retirement. She wants to address several financial issues before her retirement and has asked you to help her resolve the situations. Mary has four major issues that are concerning her. First is; 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...