US FIN 325 - Time Value of Money (TVM) Paper

Essay by micblackUniversity, Master'sA-, May 2006

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Time value of money concepts helps a manager or investor understand the benefits and the future cash flow to help the manager or investor if the future benefits will justify the initial cost of the project or investment. In this paper, I will explain how annuities affect TVM problems and investment outcomes. I will also address the impact of the following on TVM; interest rates and compounding, present value, opportunity cost, and annuities as well as the Rule of 72.

How do annuities affect TVM problems outcomes

Annuities are an investment that promises a constant amount of cash over a certain period. And, since annuities generally gain interest, the organization receiving the payments are gaining interest. Annuities can be calculated differently based on the terms of the agreement between the two parties.

How do annuities affect TVM investment outcomes

Annuities affect TVM investments in a negative manner when the money is accumulating interest.

If the money paid with simple interest, the interest is calculated annually at the rate determined. If the interest is compounded, the interest is calculated annually on the existing balance and as the balance grows, so does the balance until the principle is paid down. When these investments are in favor of the loaner/bank, the compounded interest is the positive calculation since it earns more money for the loaner/bank.

What is the impact of Interest Rates and Compounding on TVM

When compounding periods are more frequent, interest is received more often, and therefore the future value is greater. In addition, when analyzing, the greater the interest rate, the greater the return on investment. Both of these, interest rates and compounding periods, can quickly increase the rate at which an investment grows or a debt increases.

What is the impact of Present Value on TVM (of...