Time Value of Money

Paper Summary:

The paper relates that money has present and future values as demonstrated in a sequence of equal payments made at equal periods, which is called annuity. The author points out that the present value of an ordinary annuity is its value at the beginning of the term, the value of one period before the first payment or the sum of discounted payments at the beginning of the term. The paper relates that future and present value analysis is a method of comparing the value received or expected to be received at different time periods.

Table of Contents
Effects of Annuities on PVM Problems and Investment Outcomes
Interest Rates and Compounding
PV (Future Payments Received)
FV (Investment)
Opportunity Cost (Amortization and the Rule of 72

From the Paper:

"Generally, interest is specified in terms of a percentage rate for a period of time, usually a year. For example, interest at 10% means an annual cost of borrowing an amount of money, called the principal, is equal to 10% of that amount. The interest rate and the time period are assumed to be stated in common units. If $100 is borrowed at 10% annual interest, the total to be repaid is $110 - the amount of the principal, $100, and the interest for a year, $10 ($100x.10x1), using the simple interest formula i=prt where i=interest, p=principal, r=rate and t=time. "

Sample of Sources Used:

• Benshoof, M. (2005 March), "The Time Value of Money" Professional Builder, 70 (3, 74).
• Cedar Spring Software, Inc. (2002). "Future Value" Retrieved March 17, 2006 from http://www.getobjects.com/Components/Finance/TVM/fv.html
• Definition of "Opportunity Cost" (n.d.). Retrieved March 17, 2006 from http://www.totalreturnannuities.com/annuity-glossary/o/opportunity-cost.html
• Freeman, L.N. (2000 January 15). "How to Assess Investments with Time Value of Money" Ohpthalmology Times, 25(2,34).
• Kennon, Joshua (2006). "The Rule of 72" Retrieved March 17, 2006 from http://beginnersinvest.about.com/cs/21jumpstreet/a/012501a.htm

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