Time Value of Money
M. Scott Peck once said, "Until you value yourself, you will not value your time. Until you value your time, you will not do anything with it." (2006). In the next paragraphs as the unveiling of a financial scenario occurs, one will see the importance in time value of money and the effects caused by the influence of annuities. In addition, while exploring the concept of annuities, one will notice other factors. Factors such as, interest rates, present and future value and the rule of 72; which ultimately contribute to the impact in time value of money. The best and easiest way in explaining the importance in time value of money is the scenario where by pretense that one has won the lottery. The scenario retrieved from
…show more content…
If one continues to keep the money in the bank, what will the future value of the home assuming the interest rate remains the same?
Present Value Interest Rate Period =
11,000 .10 1 12,100
The table above illustrates an earning of $1,100 dollars in interest after the second year. This $12,100 dollars is the future value of $10,000 dollars in two years at 10%, hence resulting on investing for more than one period. When looking into payment options or annuities, according to Gregory A. Kuhlemeyer, Ph.D. "Annuities represent a series of equal payments or receipts occurring over specified number of equidistant periods." (2004). Assuming now that one makes annual deposits of $1,000 dollars deposited at the end of the year earning 10% interest for the next three years.
Year 1 $1,000 dollars deposited at the end of year = $1,000
Year 2 $1,000 x .10 = $ 100+ $1,000 + $1,000 = $2,100
Year 3 $2,100 x .10 = $ 210+ 2,100 + 1,000 =
…show more content…
However, for year two, the total deposits and earnings would be of the $2,100 dollars, deposit obtaining interest rate earnings of $100 dollars. Now as the new total is reinvested, thereby earning compound interest. When looking at the table for year three, one can see a total deposit and earnings of $3,310 dollars. Thus resulting in a $310 dollars earning at the end of the three year period. The rule of 72 is very simple to explain. The rule of 72 is a calculation that allows one to uncover the length in time when some one can expect to double his or her investment. To find this out, divide 72 by the interest rate. For example, if one deposits the $10,000 dollars at six percent interest a year. One should expect 12 years to double the money that is 72/6= 12. In conclusion, one has realized that if the question to whether get the money now or later is asked again, the obvious answer should be now. Only because one could invest this money and earn interest on it. In addition, the process of analyzing different investment activities. Investing for a single period, more than one period. Investing on payment options or annuities. And the rule of 72; all have only solidified the trueness in Benjamin Franklin famous quote, "Remember that time is money."
When comparing the NPV to the amount of the investment I find that there will be a before tax profit of $11,550, meaning that this could be a good investment.
Can We Keep Our Promises? The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor. Robert Arnott describes risk and return as “having two sides of the same coin” meaning risk is inseparable from return. Arnott points out the most important risks that are faced by managers of company pension plans: underperforming other corporate pension funds (their peers), losing money (mostly associated with portfolio standard deviation or volatility), and underperforming the values of pension obligations and therefore losing actuarial ground.
This paper explores the characteristics of traditional and Roth IRAs, as well as the similarities and differences between both. The main characteristic of both IRAs is that both are considered tax shelters—a way for individuals to receive reduced tax liability by decreasing one’s taxable income. Traditional IRA’s are called “deductible” because contributions made with earned income, up to specified limits, are fully or partially deductible from income depending upon factors such as adjusted gross income and filing status. Upon withdrawal, the money is then taxed as ordinary income. Roth IRAs are the antithesis—the money that you contribute here is already taxed at your marginal tax rate and the withdrawals are generally not taxed. Only money that is considered investment income is taxed. Because of the income limits of Roth IRAs, some individuals choose first to contribute to traditional IRAs or employer-sponsored programs and subsequently convert to a Roth IRA. For younger individuals with lower incomes, Roth IRAs seem to be the better choice based on the below research. The money is taxed at a lower rate and then contributed. As one ages, tax rates are probable to rise and the cost of contributing increases as a result. Saving in full measure, below the legal limit and beginning this process at a young age seems the best option for a enjoyable retirement in years to come.
“Why We Keep Playing the Lottery”, by freelance journalist Adam Piore takes a very in depth look as to what drives millions of Americans to continually play the lottery when their chances of winning are virtually non-existent. He believes that because the odds of winning the lottery are so small that Americans lose the ability to conceptualize how unlikely it is that they are going to win, and therefore the risk of playing has less to do with the outcome, and more to do with hope that they are feeling when they decide to play. It 's essentially, "a game where reason and logic are rendered obsolete, and hope and dreams are on sale." (Piore 700) He also states that many Americans would rather play the lottery thinking ,"boy, I could win $100 million" (705) as opposed to thinking about all of the money they could lose over time.
With that, it is time for the investor set a goal. Is the goal that of short or long term success? Is there a specific rate of return you wish to achieve? Or do you simply wish to come out ahead? Once the goals are put into place it is time for investment strategies. The investors goals will be key in helping plan the strategies for the investor.
Time value of money (TVM) is a monetary concept that is very important to all parts of the financial world. This concept basically says that $100 today is worth more than $100 a year from now (or anytime in the future). Also, an individual should earn some value of compensation for not spending their money. This compensation is essentially called the interest that will be earned on the initial cash. What about when an individual opts to receive money in the future rather than today? That can lead to problems. This is because they are taking a gamble by loaning money- since there is almost always risk in loaning money. A couple of these risks include inflation and default risk. Default risk means that the person who borrowed the money does not repay the money to the person that loaned it. Inflation means that the general prices of products will rise. How does all this work? In theory the person that gets the $100 today could invest it, even at a very low annual percentage rate (APR), and still come out ahead. If they invest it at 2% APR, they would have $102 at the end of one year. Th...
A traditional analysis gives a mistakenly high value to dollars in the future, money in the future is given the same value as money today; but in reality, money in the fu...
The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This rate seemed quite high so you called a friend who works for one of Damon’s competitors. The friend told you that the 21% return figure was determined by dividing the two-year appreciation on investments in the fund by the average investment. In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
The lottery is something everyone wants to win no matter what the prize. People buy their tickets and await their fates. Some people win the lottery and many more lose. Losing the lottery causes something inside of us to die, but it is almost impossible to quit playing. The gambling becomes an addiction. The reason why people are constantly drawn to these lotteries is because deep down, the people who play them are convinced they can win.
In this article we will discuss some basic strategies that many people use when playing the lottery. Some people will use these strategies simply because they have always used them in the past, other people use them in pure belief that these strategies actually do work and eventually will bring them a fortune. Although
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
The same time value of money can be seen in state governments and lotteries. For example, a person wins a lottery worth one million dollars. This person is given three options, and each option has a different fee attached to it. The first option is to receive $20,000 a year for the next 50 years. The second option is to receive a lump sum now of one million dollars. This option has the largest fee. The third option is to receive half the money now and the other half over the next 25 years. One would use the time value of money to determine the better deal.
Financial Future: Where Will it be in 10 Years? Retrieved on November 20, 2013 from
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.