Question

Explain the concept of time value of money, including compounding and discounting. Consider how time value of money applies to your personal life by addressing the following:

- Describe at least one specific personal situation in the past where the use of time value of money concepts would have helped you make a better decision. Explain how time value of money applies to this situation.
- Describe at least one specific personal situation that you expect to encounter in the future where you will use time value of money concepts to help you make a better decision. Explain how time value of money applies specifically to this situation.
- 250 words

Answer #1

ANSWER:

**Time Value of Money** is the effect of
application of interest. An amount received today is worth more
than the same amount received on a future date. Because the money
received or paid today will earn interest for the interim period
and will grow in volume during that period. Inversely, the amount
received or paid on a future date is equivalent to a lesser amount
today, the difference being interest during this period.

**Compounding** is the process of charging interest
on the amount of interest applied for the previous period. For
example, for a loan or deposit for one year, if interest is to be
compounded and at monthly rests, interest is calculated at the end
of every month and added to the principal so that interest for next
month is calculated on the combined sum (principal and interest for
the earlier month) and so on.

**Discounting** is the process by which Present
Value (PV) of a sum is ascertained. PV is today’s equivalent of a
sum received or paid on a future date. It is the future sum, net of
interest during the interim period. Since interest fetches interest
applicable for earlier period (compound interest), interest reduced
from the future sum, for arriving at the present value, is the
interest compounded at specified intervals.

**Illustration of Time Value of Money- Personal
finance**

- A friend owed a sum of $ 1,000 to me one year ago. I agreed that he need pay it only now, that is, after one year. My Savings account was getting interest at 6% per year, compounded quarterly. Had I insisted on getting the amount one year ago and deposited in the Savings account, it could have grown to $ 1,061.36 as follows:

$1,000 * (1+6%/4)^4 = $1,061.3636

- I am offered a gift of $1,200 by a relative. He promised to either pay it in lump sum after one year or in monthly installments of $100 each from current month on wards. The monthly payments, from now, if opted, will fetch interest if deposited on receipt, in interest bearing deposit accounts. Hence I shall prefer the monthly payments option.

"Time Value of Money "
The time value of money is a critical concept to understand in
accounting, especially when dealing with loans, investment
analysis, and capital budgeting decisions. The time value of money
concept can be used to decide which projects to start and what
investments to make. You can also utilize the time value of money
concept in your personal life.
Provide two (2) decisions you may need to make
that could involve the time value of money....

Explain the time value of money concept. What is meant by
the effective interest rate. How are time value of money concepts
applied to accounting applications in determining the present value
of expected cash flows and in valuing bonds?

Explain the time value of money concept. What is meant by the
effective interest rate. How are time value of money concepts
applied to accounting applications in determining the present value
of expected cash flows and in valuing bonds?

1) What is the meaning of the time value of money?
2) How are compounding and discounting related?
3) What happens to the future value of a lump sum invested the
longer the time period for which it will be invested?

Explain the concept of time value of money in the context of
simple interest. How would you use this in retirement planning

Explain the concept of the time value of money and how it is
related to the opportunity costs of a college education, both while
attending college and after graduation.

Time Value Money Ice Breaker Discussion Please take a moment to
click on "Time Value money" topic and and share your understanding
to that concept with the class. What was the most important
concepts you learned from reviewing the material of that week? How
can you use the topic in better understanding your work or future
career? What questions are uppermost in your mind as we conclude
the session of this week (questions must be related to the material
presented...

Financial managers and investors use time-value-of-money
techniques when assessing the value of the expected cash flow
streams associated with investment alternatives. Indicate two
aspects of the time-value-of-money that can also be of interest to
you in personal finances. Describe how the concepts of
future and present value can be adopted into your daily life style.
Will this additional understanding of time value make a difference
to you or is it too complex to routinely adopt?

Convinced that time value of money is an essential concept, you try
to understand the weaknesses associated with the method we use to
discount or compound money in different time periods. Explain three
weaknesses associated with the time value of money concept and the
methodology we use.

How can a corporation best take advantage of the concept of the
time value of money?
Contain at least one reference.

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