Finance 130 Time Value of Money- Study Guide Shireen Esmail

Money today is worth more than the same amount of money received in the future. Time value of money is the math of finance where interest is earned over time by saving or investing money. Money can increase or grow over time if we can save (invest) it and earn a return on our savings. Present value---- value of an investment TODAY Future Value---- value of an investment at a FUTURE DATE.

To find the PRESENT VALUE we use discounting. PV= FV (PVIF)

An arithmetic process where a future value decreases at a compound interest rate over time to reach a present value.

Example: If you want to have $10,000 in 3 years and you can earn 8% interest, how much would you have to deposit today? Solution: Future Value = $10,000 n= 3 years PV= FV (PVIF) $10,000(PVIF) 8% 3 $10,000 (.794) = $7,940 PRESENT VALUE interest =8%

-The present value of a future value decreases as the interest rate increases. So if interest PRESENT VALUE

To find the FUTURE VALUE: value of an investment in the future. The future value increases at an increasing rate as the interest rate is increased. So if interest Future Value

FV= PV (FVIF)

Example: You have $450,000 to invest, if you think you can earn 7% interest, how much could you accumulate in 10 years? n= 10 years interest = 7%

Solution: PV= $450,000

FV=PV (FVIF) $450,000(FVIF) 7% 10 $450,000(1.967) =$885,150 FUTURE VALUE