CheckPoint Time Value of Money
Uploaded by ddscoolz on Feb 22, 2013
FIN200 Week 8 CheckPoint Time Value of Money
• Write a 200- to 300-word description of the four time value of money concepts: present value, present value of an annuity, future value, and future value of annuity. Describe the characteristics of each concept and provide an example of when each would be used.
Present Value is the amount that must be deposited today at a given interest rate to equal to $1 at the end of a specified time period. This time value of money concept is useful in determining “what amount must invested today to have a certain amount after certain period given the interest rate?”
Example, if I want to have $50,000 after 5 years, how much should I deposit today to a bank if it will earn 10% per annum.
Future Value is the amount of $1 deposited after end of a specified time period given the interest rate. This is useful in determining “what will be the value of the investment today after certain period given the interest rate?”
Example, if I deposited $10,000 today, how much wills my deposit worth after 5 years if it will earn 12% per year?
Present Value of Annuity is the amount that must be deposited today at a specific interest rate to permit withdrawal of $1 at end of regular periodic intervals for the specified time period. This is useful in determining “what amount must be invested today to permit withdrawal at the end of each period given the interest rate?”
Example, how much should I invest today if my money will earn 20% annually so I can withdraw $20,000 per year for 3 years?
Present Value of Annuity is the amount to which payment of $1 will accumulate if payments are to be made at the end of each period at the given interest rate. It is useful in determining “what will be the value of the investment after the specified period at a given interest rate if payments are to be made at the end of each period?”
Example, how much wills my investment worth after 10 years if I will deposit $1,000 at the end of each year at 12% per year?