Time Value of Money

Discussion: Time Value of Money
Time value of money is a very powerful concept, especially when considering the difference between present value and future value. For example, one of the wisest investment decisions is to invest money in a way that compounds its value over time. Compound interest is paid on both the principal amount (i.e., the amount of money you put in) and also on any interest you previously earned (i.e., the interest on interest). When your interest earns interest, the phrase your money makes money for you becomes true. Financial managers not only need to understand these concepts, but must also be able to communicate them clearly to help leadership teams to make better, more informed decisions.
To prepare for this Discussion:
Consider the following scenario: You are a financial manager, and you want to help your client understand the idea that the money they invest will make more money for them in the future. How can you show your client the benefit of investing their money?
Review this weeks Learning Resources.
Post a 150- to 225-word (2- to 3-paragraph) explanation of time value of money related to your clients investments. To support your explanation, do the following:
Describe the concepts of present value, future value, and annuities to demonstrate to your client the benefits of investing.
As part of your response, perform the following calculation: Take $10,000 of (fictitious) purchased stock, choose an interest rate, and calculate the amount of money that your client would have after 60 years if the interest is compounded annually. What would the $10,000 yield in the future?
To support your response, be sure to reference at least one properly cited scholarly source.
Required Resources
Time Value of Money
Imagine if you had $100. Consider this: Is that $100 worth more than $100 will be worth in 2 months? What about $101 in 2 months? Through these resources, you will explore the concept of time value of money, a powerful topic of finance that will help you answer these questions.
Investopedia. (2013c). Time value of money explained[Video file]. Retrieved fromhttps://www.youtube.com/watch?v=MdK-A1VQJls&list=PL5p5dScYozMgwB1nGoyrkfNbuiyZy98MV&index=227
Note: The approximate length of this media piece is 1 minute.
Laureate Education (Producer). (2019d).Time value of money[Video file]. Baltimore, MD: Author.
Note: The approximate length of this media piece is 4 minutes.
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Lumen Learning. (n.d.-m). Introduction to the time value of money. InBoundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/introduction-to-the-time-value-of-money/
Time Estimate: 7 minutes
Present and Future Value
What steps do you need to take to find the future value of a number? What would the steps be to find the present value of a number? These resources provide information on the concepts of present and future value and how to make these calculations.
Lumen Learning. (n.d.-h). Future value, single amount. InBoundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/future-value-single-amount/
Time Estimate: 13 minutes
Lumen Learning. (n.d.-q). Present value, single amount. InBoundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/present-value-single-amount/
Time Estimate: 14 minutes
Calculating Payments, Interest Rates, and Periods
Excel and financial calculators allow you to calculate various financial problems such as finding the payment amount of an annuity, the number of periods it would take for a present amount to grow into a future amount given those amounts and a discount rate, and finding the interest rate (or discount rate) of an investment given the future value, present value, and amount of time (or number of periods). To calculate these problems, you will need enough given data and then determine what the problem is asking. Then you will have to calculate the unknown data using the given data and correct financial formula. Through these resources, you examine how to calculate financial problems to help determine the time value of money.
Crute, S. (2016). Excel finance functions: PMT, PV, RATE, NPER. Retrieved from https://www.youtube.com/watch?v=AfWRp1mExQw
Note: The approximate length of this media piece is 9 minutes.
Finance & Accounting Videos by Professor Coram. (2012).Calculating the number of periods (N or NPER) using Excel[Video file]. Retrieved fromhttps://www.youtube.com/watch?v=AhgXzlw_7a0
Note: The approximate length of this media piece is 2 minutes.
KnowledgeCity. (2010).Calculate payments and interest with Excel[Video file]. Retrieved from https://www.youtube.com/watch?v=lEu6FgANDj8
Note: The approximate length of this media piece is 4 minutes.
Lumen Learning. (n.d.-b). Additional detail on present and future values. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/additional-detail-on-present-and-future-values/
Time Estimate: 20 minutes
Lumen Learning. (n.d.-ff). Valuing multiple cash flows. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/valuing-multiple-cash-flows/
Time Estimate: 8 minutes
Lumen Learning. (n.d.-hh). Yield. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/yield/
Time Estimate: 7 minutes
Pyzdek, T. (2013). Continuous compounding [Video file]. Retrieved from https://www.youtube.com/watch?v=S19fGwpH4lI
Note: The approximate length of this media piece is 2 minutes.
Annuities
Through these resources, you will examine annuities, which are fixed amounts of cash flows that are paid or received over a given amount of time. To be an annuity, the payments must be the same for each year and the time frame has to be fixed. If the time frame is not fixed and the cash flows can go on forever, then it would be considered a perpetuity. If the cash flows for each year are different over the 10-year example, then it would be considered a multiple cash flow, not an annuity. If it is a perpetuity where the cash flows increase or grow by a given percentage each year, then it would be considered a growing perpetuity.
Excellsfun. (2010). Excel Finance Class 38: Calculate APR and EAR given cash flows from annuity [Video file]. Retrieved from https://www.youtube.com/watch?v=1DBQ7O5xDAU
Note: The approximate length of this media piece is 3 minutes.
I Hate Math Groups, Inc. (2014). How to build an amortization table in Excel (Fast and easy) Less than 5 minutes [Video file]. Retrieved from https://www.youtube.com/watch?v=M9xD3yyLSAI
Note: The approximate length of this media piece is 5 minutes.
ITutorMath. (2013). Using Excel to find PV for an annuity [Video file]. Retrieved from https://www.youtube.com/watch?v=5whm-irKKtY
Note: The approximate length of this media piece is 1 minute.
Lumen Learning. (n.d.-d). Annuities. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/annuities/
Time Estimate: 14 minutes
Introduction to Capital Budgeting
Capital budgeting is the process in which an organization will evaluate potential projects and investments to determine if they are worthwhile investments. The more risk the project contains, the higher the discount rate will be designated. The higher the discount rate is, the less valuable these future cash flows will be as they are discounted back to the present time. In other words, the projected projects cash inflows must exceed its projected cash outflows by a determined amount to be accepted. These resources provide a broad overview of capital budgeting methods, such as the most common ones: Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index, and the Payback Method.
Lumen Learning. (n.d.-l). Introduction to capital budgeting. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/introduction-to-capital-budgeting/
Time Estimate: 27 minutes
Internal Rate of Return
Through these resources, you will examine the internal rate of return (IRR), which is another capital budgeting method. IRR is related to NPV in that IRR is the discount rate for which NPV equals zero. In other words, one would set the NPV to zero and solve for the discount rate (or the IRR).
Investopedia. (2017). How to calculate internal rate of return (IRR) video tutorial [Video file]. Retrieved from https://www.youtube.com/watch?v=CkxUzMDEUgg&feature=youtu.be
Note: The approximate length of this media piece is 4 minutes.
Lumen Learning. (n.d.-j). Internal rate of return. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/internal-rate-of-return/
Time Estimate: 18 minutes
Net Present Value
These resources provide information on the net present value (NPV), which is a capital budgeting method. It calculates the present value of cash inflows and subtracts the present value of cash outflows from it using a forecasted discount rate that reflects the riskiness of the proposed project. It is also the superior capital budgeting method because it calculates projects in dollars earned (or wealth generated). You always want to choose NPV over IRR or the other capital budgeting methods, and you will explore why through these resources.
Finance & Accounting Videos by Professor Coram. (2011). Profitability index calculation using Excel [Video file]. Retrieved from https://www.youtube.com/watch?v=1CcRIdUU3sw
Note: The approximate length of this media piece is 3 minutes.
Laureate Education (Producer). (2019c). Net present value [Video file]. Baltimore, MD: Author.
Note: The approximate length of this media piece is 5 minutes.
Accessible player
–Downloads–
Download Video w/CC
Download Audio
Download Transcript
Lumen Learning. (n.d.-o). Net present value. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/net-present-value/
Time Estimate: 15 minutes
The Payback Method
Through these resources, you explore the payback method, which is a capital budgeting method that is easy to implement. But the payback method ignores the time value of money and other risks. You want to include the time value of money component (discount the cash flows back to the present using an appropriate discount rate.) Although the payback method has serious faults as ranking criteria, it does provide a range on how long funds will be tied up in a project. Thus, the shorter the payback period, other things held constant, the greater the project’s liquidity. Also, since cash flows expected in the distant future are generally riskier than near-term cash flows, the payback is often used as an indicator of a projects riskiness.
Edspira. (2015). The payback method [Video file]. Retrieved from https://www.youtube.com/watch?v=YX4NoZN8YWU
Note: The approximate length of this media piece is 10 minutes.
Lumen Learning. (n.d.-y). The payback method. In Boundless finance. Portland, OR: Author. Retrieved March 19, 2019, from https://courses.lumenlearning.com/boundless-finance/chapter/the-payback-method/
Time Estimate: 15 minutes
Padhi, M. (2015). Computing discounted payback period (8.3) [Video file]. Retrieved from https://www.youtube.com/watch?v=X9vX-MtKi5Y
Note: The approximate length of this media piece is 2 minutes.

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