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1. QUESTION

Money has different values based on time. Money in your pocket has a current value, but money owed to you has a varying value based on how sure it is that you will receive it and when. It is possible to estimate its value. In this assignment, you will analyze the value of money on the basis of this Week’s learning.

Review Understanding The Time Value of Money to attain more information on how the value of money is based on time.

Find the following values for a lump sum assuming annual compounding:

The future value of \$500 invested at 8 percent for 1 year
The future value of \$500 invested at 8 percent for 5 years
The present value of \$500 to be received in 1 year when the opportunity cost rate is 8 percent
The present value of \$500 to be received in 5 years when the opportunity cost rate is 8 percent
Analyze present and future values and their implications for the balance sheet and the budget of an organization.

Subject Pages Style Business 4 APA

Time Value for Money

Time value for money (TVM) is a concept which used to explain the theory of moment in the present time, is worth more the same amount of money in the future time.  This concept is based on the theory of “a bird in hand is worth two in the bush”.  Researchers as well as investors argue that if one is given \$10,000 today, the person could invest the amount and be able to generate another \$ 10,000.  Adding the realized profit to the initial investment, the person will be having a total of \$ 20, 000 in future time (Gong et al., 2017).  This principle of finance holds that, so long as an amount of money is able to earn interest, then it is able to attract more, it is given at the present time. The concept of time value for moneys is at times referred to as the present discounting value. This therefore, report analyzes briefly the concept of time value for money.

The Basis for the Time Value for Money Concept

According to López, López and Martínez (2018), the concept for time value for money is drawn from a   general belief that, investors often see it as rational to receive their money at the current time, as opposed to receiving the same amount of time in the future time. Investors as well as researchers have proven that if an amount is deposited, in a savings account, then it will obviously attract interest after a certain duration.. An example is depositing of money into savings account, will obviously earn a certain amount of interest rate, hence the amount is said to be in compounding in value. The formula for calculating the future value of money is as follows;

FVN = PV x (1 + r)N

Where;

FV = the future value

PV = present value

r= the rate of interest

N= the number of years

Compound and Simple Interest

López, López and Martínez (2018), defines compound interest as  the addition of to the principal of a loan or an investment, as result of re-investment, rather than paying it out, so that the interest in the next period is accrued on the basis of principal plus the interest which has been accumulated. Simple interest on the other hand, refers to an interest which is accrued out of the principal exclusively, without taking into consideration the previously accumulated interest. Compound interest is preferred more, as its realizable amount is higher than that of the simple interest.

Present Value and Future Value

Present value is defined as, the value of money to be invested in the future, at the present time.  Calculation is done at a specific fixed interest rate, known as the discount rate, hence in a position to attract a certain amount of return.  A high discount rate gives a low income and vice versa (Gong et al., 2017).  The future value on the other hand, is defined as the value of an amount invested currently, in the future time, at a fixed discount rate. Just like in the case of present value, the higher the rate of discount, the lower the future value and vice versa. Present and future value can be explained more using the following calculations;

The future value of \$500 invested at 8 percent for 1 year

= 500 (1+0.08)1

= \$ 540

The future value of \$500 invested at 8 percent for 5 years;

= 500 (1+0.08)5

= \$ 734.66

The present value of \$500 to be received in 1 year when the opportunity cost rate is 8 percent

Present value is calculated using the following formula;

PV = C1 / (1+r)n

Where;

C1 = Cash flow at period 1

r = the rate of return

n = number of periods

Hence;

= 500/ (1.08)1

= \$ 462.96

The present value of \$500 to be received in 5 years when the opportunity cost rate is 8 percent

= 500/ (1.08)5

= \$ 340.29

Present and Future Value Impacts on Balance Sheet and the Budget Organization

Present value and future value tends to have, will increase the value of the asset as reflected in the balance sheet (Nagaraju, et al., 2016). This is achieved by the element of the time value tool adding the rate of return on assets. The budget of the organization due to the elements on interest which is paid on annual basis.

### References

 Gong, D.-C., Kang, J.-L., Lin, G. C., & Hou, T. C. (2017). On an IC wire bonding machine production–inventory problem with time value of money. International Journal of Production Research, 55(9), 2431–2453. López-Díaz, M. C., López-Díaz, M., & Martínez-Fernández, S. (2018). A stochastic order for the analysis of investments affected by the time value of money. Insurance: Mathematics & Economics, 83, 75–82. Nagaraju, D., Ramakrishna Rao, A., Narayanan, S., & Pandian, P. (2016). Optimal cycle time and inventory decisions in coordinated and non-coordinated two-echelon inventory system under inflation and time value of money. International Journal of Production Research, 54(9), 2709–2730.