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Time Value Of Money: Essay

969 words - 4 pages

Time Value of Money:

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Time Value of Money is the concept that a certain amount of money has a different value today than it would in the future. It is explained as the idea that money at hand at the present time is worth much more than the equal amount would in future (Crosson, 2008). If you lend your friend money today, most likely he will refund the same amount you lend him in future. That money will have added no value to itself. Lending it to your friend is not an investment. The sooner you get the money back, the better because you can invest it elsewhere.
Therefore, if one was not ...view middle of the document...

This is a fundamental formula used in calculations involving time value of money because other formulae are derived from it. In this problem, I shall use the following formula to get my answers:
FV (A) =A* {[(1+i)n-1]/i}……………….. Eq. 1(Time Value of Money, 2014)
Where; FV (A) is the value of annuity at time=n
A is the value of the individual payment in each compounding period
i is the interest rate at which the amount will be compounded at each period
n is the number of payment years/ period
If I want to accumulate a total of $ 1 million at the end of 30 years, I should deposit 1, 000, 000/30 i.e. each of my annual deposit will be $33,333.334. From the formula, this annual deposit will be my A, interest, i, is 10% and n will be 30 years. Substituting these values in the above formula, I get;
FV (A) =33,333.334* {[(1+0.1)30-1]/i}
FV (A) = $5, 483,134.20
From my calculation I am supposed to deposit $33,333.334 annually in order to accumulate $1 million for my retirement.
Due to time value of money offered by banks when one deposits money in a saving account, after 30 years of saving, my future value will be more than my intended value of $1 million. As calculate above, after 30 years, the value will be $5, 483,134.20. Equation 1 above is known as future value of an annuity. It calculates what will be the value of money annually deposited in a bank after a given period of time.

The retirement benefit will be calculated as follows:
$5, 483,134.20- $1,000,000=$4,483,134.20
$4,483,134.20 is the total amount of interest that my annual deposits will have accrued over 30 years. From the formula, the variables I can change that can make me reduce my annual deposits...

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