Time value of money essay

time value of money essay

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Sol: Sn p ( 1r1 ) ten ( 1r2 ) ( n-x ) 8000 (.10 ) 3 (.08 ) 2 8000 (.331 ) (.166 ) Rs 12415.568 Illus: An investor puts Rs 10,000 into an investing for 10 old ages. The rate of involvement earned is. For the first 4 old ages,. For the following 4 old ages and. For the last 2 old ages. How much will the investing be worth at the terminal of 10 old ages?

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Now and rewards rising prices is expected to be. Formula: Sn p ( 1r ). Rs 8,000 (.10 ). Withdrawal of capital or involvement, if an investor takes money out of an investing, it will discontinue to gain involvement. Therefore, if an investor, a puts Rs 3,000 into a bank sedimentation history, which pays involvement at. And makes no backdowns except at the terminal of twelvemonth 2, when he takes out Rs 1,000. What would be the balance in his plagiarism history at the terminal of 4 old how ages? Sol: Original investing. 3,000.00 Interest in twelvemonth 1 ( 8 ) 240.00 Investing at the terminal of twelvemonth 1 3,240.00 Interest in twelvemonth 2 ( 8 on Rs 3,240 ) 259.20 Investing at the terminal of twelvemonth 2 3,499.20 Less: Withdrawal 1,000.00 Investing at the start of twelvemonth. 3,498 Less: backdown 1,000 2,498 Rs 2,498 invested farther 2 old ages at 8 would Increase in value to Rs 2,498 (.08 ) 2 Rs 2,913 Changes in the rate of involvement If the rate of involvement alterations during the period of an investing. In the subsequent old ages, what would be the size of entire investing at the terminal of 5 old ages?

What would be the entire value of Rs 5,000 invested now? After 3 old ages, if the involvement rate is 20 per annum. After 4 old ages, if the involvement rate is 15 per annum. After 3 old ages if the involvement rate is 6 per annum. Sol: S3 5000 (.20 ) 3 5000.728 Rs 8,640. S4 5000 (.15 ) 4 5000.749 Rs 8,745. S3 5000 (.06 ) 3 5000.191 Rs 5,955. Inflation: The same intensifying expression can be used to foretell hereafter monetary values after leting the for monetary value rising prices. If we wish to cognize how much a skilled employee will gain per annum in 5 old ages clip, given that he earns Rs 8,000.

time value of money essay

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Therefore involvement farm for 2nd twelvemonth will be on Rs 2200. So involvement will be earned on involvement. Formula for combination: Sn p ( 1r ). Where p original amount invested r involvement rate, expressed as proportion (.05 ) nnumber of periods, snsum after n periods. Rs 2000 invested at 10 per annum for 3 old ages. So, s3 2000 (.10 ) 3 2000 (.10 ) 3 ( see the compound value tabular array for 3years and 10 ) 2000.331 Rs 2,662. The involvement earned over 3 old ages is Rs 662. If the money were invested for 6 old ages, it would be deserving. Rs 2,000 (.10 ).7The involvement earned over 6 old ages is Rs 1544.

If a amount of money is invested for a period of clip so the sum of simple involvement, which accrues, is equal to the figure of accounting periods * the involvement rate * the sum invested,. E., where poriginal amount invested ; r Interest rate ; nNumber of periods ; ssum after n periods, dwelling of the original capital plus involvement earned. How much will an investor have after 5 old ages if he invests Rs 1000 at 10 simple involvement per annum? Sol: S5Rs 1000 ( 5. ) Rs 1500. Compound Interest: Interest is usually calculated by the agencies of intensifying. If a amount of money, the principal, is invested at a fixed rate of involvement and the involvement is added to the principal and no backdowns are made, so the sum invested grows at an increasing rate as clip advancements, because involvement earned in earlier. Rs 2,000 is invested to gain 10 involvement. After 1 twelvemonth, the original chief plus involvement will amount to Rs 2,200.

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time value of money essay

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Time value of Money or any similar topic only for you. Order now, investors may wish to cognize: How much return will be obtained by puting money now for n old ages? How much return will be obtained in n old ages clip by puting some money every twelvemonth for n old ages? Time is an of import component in investing determinations. The longer an investing continues, the greater will be the return required by the investor.

For illustration, if a bank lends Rs 20,000 to a company, it would anticipate a bigger involvement payment if the loan last for two old ages than if it lasts for merely one twelvemonth. This clip factor in investing determination has a direct relation to rising prices every bit good as the worsening value of money over a period of clip. The cost of involvement would increase for a longer period of investing even if there is no rising prices. The consequence of rising prices is merely to increase the size of the return required by the investor over any period of clip. The two major thesis techniques of fiscal mathematics are intensifying and discounting. These techniques are really closely related to each other, and are discussed hereunder. Simple Interest: Simple involvement is the sum if involvement, which is earned in an equal sum every twelvemonth ( or month ), and which is a given proportion of the original investing or ( chief ).

Money left on its own is devalued by inflation. Investors, therefore, need to find a way to make their money grow faster than the rate of inflation. One method is through interest paying investments. Compounding interest accelerates return on investments, provided an investor can obtain a fixed rate of interest. Whichever method an investor chooses, understanding the time value of money is crucial to successful investment outcomes.

New York, ny: McGraw-Hill/Irwin. Retrieved March 24, 2008, from thewikipedia web site. Fiscal mathematics trades with the job of puting money or capital. If a company ( or an single investor ) puts some capital into an investing, he/she will desire a fiscal return for. if a puts Rs 1000 into history with a bank, he will anticipate a return in the signifier of involvement, which will be added to the original investing in his history ; If An endeavor invests Rs 10,000 in an point of equipment, the. We will write a custom essay sample.

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The opportunity cost associated with these choices is whether or not the planner company could have earned more money by choosing to do something else with the funds. Tvm help managers in figuring out which of the opportunities presented is the best option. The preferred alternative increases the companys monetary value today as opposed to a later point always in time. The rule of 72In finance, the rule of 72 is a method for estimating an investments doubling time or halving time. These rules apply to exponential growth and decay respectively, and are therefore used for compound interest as opposed to simple interest calculations (wikipedia, 2008). For example, if one would like to know how long it would take to double a given amount of money at eight percent interest, divide 8 into 72 and get 9 years. When a company can quickly calculate the return on investment, they will be able to make quicker and more informed decisions in regard to the investment or budget decision. The time value of Money is an important concept in financial management.

time value of money essay

of money is also known as compounding. Future value is calculated by understanding how much interest the money will earn, how long it will be earning the interest and if the money will be compounded annually or at another interval. The impact of future value on an investment most likely will be greater than the present value. Opportunity costs, many times firms need to decide on how to best utilize its cash on hand. Should they invest it in the stock market or purchase more equipment with the hopes that it will increase productivity and profitability? A tough decision in some cases, but businesses should determine which is the wiser choice based on their financial situation.

Compound interest is not only charged on the original investment, but also assessed on the interest charged or earned for each period. When comparing interest rates, it is best to use effective annual rates. This compares interest paid or received over a home common period (1 year) and allows for possible compounding during the period (Brealey, myers, marcus, 2007). The effective annual interest rate allows for figuring out what the monthly fee of borrowing money will cost a business. Present Values, the present value of money is also known as discounting. The discount rate is sometimes called the opportunity cost of money. Money can be invested to earn interest. Because money is of more value when it is cash in hand, the person holding the cash can invest the cash and in return earn interest.

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In financial management, one of the most important concepts is the time value of Money (TVM). Time value of Money concepts helps a manager or investors understand the benefits and the future cash flow to help justify the initial cost essays of the project or investment. Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding of tvm is crucial to making good buying decisions. To recognize how annuities affect the time value of money, managers need to consider the factors of interest rate, opportunity costs, future and present values of money, and compounding. Interest Rates and Compounding, in most business cases, borrowing money is not necessarily a free enterprise. It costs companies money to obtain funds on credit to finance various aspects of their business. The fee that a borrower pays to a lender for use of its money is interest. The annual percentage rate (APR) makes assumptions based on simple interest, which is interest only earned on the principal investment. Another method of accruing interest is through compounding.

Time value of money essay
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3 pages (750 words) Essay. A time line is an important tool used in time value of money analysis; it is a graphical representation which is used to show the timing of cash flows. Related Documents: Time value of Money essay.

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  1. Value of Time Essay 1 (100 words). Time is more than money as money spent can be earned again however once time spent can never be earned. There is a common saying that Time and Tide waits for none. Time value of money can besides reply such inquiries as what ones investing will be deserving at a certain point of clip in the hereafter. Presuming a certain involvement rate.

  2. Beach wanted to invest a lump sum of money today to have 100,000 when she retired at 65 (she is 40 years old today) how much of a deposit would she. The finance essay below has been submitted to us by a student in order to help you with your studies. Please ensure that you reference our essays correctly. The most important concept in finance is that of the time value of money. Free essay : time value of money exercises Author: luigi. Tava copyright sda bocconi revised 2004.10 emq 901 1 1) For a loan.2 estimate the future.

  3. The preferred alternative increases the companys monetary value today as opposed to a later point in time. Words: Pages: Let us write you a custom essay sample on Time value of Money. For only.38.9/page. Time value of Money essay. Time value of Money project Show all your work!

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