Question

1. This week we learned computations and the time value of money. Briefly explain the time value of money, its methods, and how it applies to NPV.
2. When computations are performed, it is important to justify your work by showing how the answer was determined via narrative, calculations, and formulas. Presentation is also very important and is a quality aspect in addition to utilizing a table to present data and answers.
   • How do you feel you are doing as we close out this unit?  
   • Are you optimistic about your understanding of this week’s assignments?

Answer 1

The time value of money is a concept which says the money today has more value then it has in the future as it can earn money through interest.

Methods -

1. Present Value (PV) & Future Value (FV) Method

Present value means the value of money, which you will get or pay in the future, in the present. It can be calculated by applying the discount rate to the amount to be received or paid in the future, duly considering the compounding period for each time frame.

Future Value is the opposite of the Present value, meaning, calculating the amount you will get in future by investing today.

Formulae ;

PV = FV/[1+i/n] to the power (n * t)

FV = PV*[1+(i/n)] to the power (n * t)

Where;

n = number of compounding periods per year

t = number of years

i = rate of interest