121_08SG_TVM - Future Value and Present Value Because you...

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358 Appendix B Future Value and Present Value Because you can earn interest on your money over time, the value of invested funds is greater in the future than it is today. This refers to the time value of money . To determine what a future value will be, you simply apply an interest rate to the amount of your investment and calculate the amount of interest. Add this result to your original amount and the sum becomes the future value at the end of one interest period. Repeat this process for additional interest periods, remembering to add in the interest each time. Therefore, there are three factors involved in determining a future value: 1) the amount of the original investment, 2) the length of time, and 3) the interest rate. Obviously the longer the time, the more calculations are involved. Fortunately mathematical tables are available to ease your task. Review exhibit B-2 carefully. This is the table used to determine the future value of a single investment, again assuming time and interest rate. Instead of investing a single amount for a specific period, you might wish to invest multiple amounts over time. This is an example of an annuity type investment . In other words, you invest identical amounts for several years what will the future value of these multiple investments be? Of course, you could calculate each individually and add the results, or you could consult mathematical tables which do the multiple calculations for you. Review exhibit B-4 carefully. This is the table used to determine a future value of multiple investments, again assuming time and interest rate. This table is used to answer questions like “If I start setting aside (investing) $500 each year for the next ten years, what will it be worth, assuming I can invest this money at 8%?” Exhibit B-4 shows the value 14.487 at the intersection of 10 and 8%. Multiply this value by your annual investment ($500) and the result is $7,243.50. Another way to look at present and future values is to begin with the future value and work backwards. In other words, in order to have X amount sometime in the future, how much would one need to set aside today? Again assumptions need to be made about the time and the interest rate (this is always true). As with the preceding discussions, you could calculate the result manually, but the longer the period of time the more calculations you would have to complete. Once again, mathematical tables are available to use. Study exhibit B-6 carefully. Rather than determining the present value of a single amount, you may be interested in the
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121_08SG_TVM - Future Value and Present Value Because you...

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