week 1 Time Value of Money Paper

week 1 Time Value of Money Paper - Time Value of Money 1...

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Time Value of Money 1 Time Value of Money Paper Christopher Wall University of Phoenix FINANCIAL ANALYSIS FOR MANAGERS II/FIN 325 James (Jim) J. Hellmich February 25, 2008
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Time Value of Money 2 Factors that Affect the Time Value of Money Time value of money is the concept that an amount of money in one’s possession is worth more than that same amount of money promised in the future (Garrison, 2006). The reason for this is that money today can be invested to earn interest and therefore, will be worth more in the future (Brealey, Myers, & Marcus, 2004). This paper will explain how annuities affect time value of money (TVM) problems and investment outcomes. In addition, this paper will briefly address the impact of interest rates, present value, future value, opportunity cost and the rule of 72 on the time value of money. Annuities An annuity is an evenly spaced number of payments or money received in the same amount (Cedar Spring Software, Inc., 2002). Each TVM problem has five variables: interest rate or return, time or number of periods, future value, present value, and amount of payments either made or received (Brealey, Myers, & Marcus, 2004). The present value of annuity payments received over a number of years is less than if one had the full amount in hand now to invest. The reason for this is opportunity cost. If the full amount of the annuity could be invested today in a lump sum, the final value during the same term of the annuity would be much higher due to compound interest. So opportunity cost in this case is the total amount of the annuity payments over the length of the annuity and
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This note was uploaded on 04/27/2010 for the course MBA 128798 taught by Professor Jenings during the Spring '10 term at University of South Pacific.

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week 1 Time Value of Money Paper - Time Value of Money 1...

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