Time Value of Money

2180 Words Dec 31st, 2006 9 Pages
The Basic Law in Finance – Time Value of Money We earn money to spend it and we save money to spend it in the future. However, for most people spending money in the present time is more desirable since the future is unknown. We can gratify the desire to spend money today rather than in the future by knowing the basic law in finance – time value of money. This means that a dollar today is worth more than a dollar at some time in the future. Unfortunately, people very often want to buy things at the present time which cost more that what they earn, so they pay with credit cards or take out loans which have to be paid off at some point in the future. In this paper we will discuss the present value of money, the future value of money, …show more content…
Or, ask yourself this question:
• What is today's value of future net receipts?

Initial Outlay Year 1 Year 2 Year 3 Year 4 Year 5
Cash In $116,667 $206,000 $212,180 $218,545 $225,102
Cash Out TI's: ($180,000) Comm: ($ 82,710) OPEX: $85,000 $85,000 $85,000 $85,000 $85,000

Net Cash Flow ($262,710.00) $31,667 $121,000 127,180 133,545 140,102 - - - - - - - - - -
Today's Value (262,710.00) - - - - - 28,788.18 ------- - - - - - 100,000.00 ---------------------- - - - - 95,552.22 ------------------------------------- - - - 86,992.32 ---------------------------------------------------- - - 91,213.03 -------------------------------------------------------------------- - $139,835.75 The present value of future net income; "NPV."

The future value of money invested is calculated by adding the present value and the interest earned (interest equals to present value times the rate of the interest, and is represented as a percentage). However, the future value of money may also work against us when for example we pay with credit cards and we have to pay it off with the money from the future plus interest expense.
Suppose that instead of receiving $1,000 we spent $1,000 by purchasing merchandise on a credit card. Note that a dollar today is worth more than a dollar tomorrow, so we will have lost money because we will need to pay off our credit card account

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