Arguments for the Time Value of Money
 |
| Arguments for the Time Value of Money |
If you got $100 today or $100 a year from now, which would be the better choice and why?
This question is the classic way that TVM concepts are taught in almost every business school in the United States. The question most people ask, choose to get money today. They are right, according to TVM, which believes that the number available today exceeds the same number in the future. but why? What are the advantages and disadvantages of this decision?
There are three main reasons to support the TVM theory. First, a dollar can be invested and interest can be earned over time, making it potentially profitable. Additionally, currencies are subject to inflation, eroding their purchasing power over time and depreciating in the future.
After all, there is always a risk that the dollar will not actually be received in the future, and if you keep the dollar now, no risk will occur (because the old bird is better on hand. In the bush). Estimating this ultimate risk is not easy, so it is very Difficult to use it correctly.
explain net present value
Will you have $100,000 today, or $1,000 a month for the rest of your life?
Most people have some vague idea of which way they will go, but from a financial standpoint, a net calculation of current prices can tell you which is better if you take ,000 100,000 if you know it.
The specific changes in the calculation of the time value of amounts are as follows:
As you've seen with many lottery payouts, NPV allows you to calculate the value of a series of future payouts in one go today.
The current value tells you the current value of the future amount.
The future price gives you the future price of the cash you have now.
Someone asks you, which one do you prefer: $100,000 from today or $120,000 a year from now? ,000 100,000 is the "present value" and $120,000 is the "future value" of your money. In this case, if the interest rate used in the calculation is 20%, then there is no difference between the two.
Determining the time value of money
There are five factors in the TVM calculation. they are:
1. Number of times involved (month, year)
2. Annual interest rate (or discount rate, depending on the calculation)
3. Current price (currently in your pocket)
4. Payment (if present; if not, payment is zero.)
future value
Calculate future and present value
Many people use financial calculators to solve TVM problems faster. By knowing how to use one, you can easily calculate the current amount in the future and vice versa. Armed with four of the five components above, a financial calculator can easily identify the missing factors.
But you can also calculate future price (FV) and current price (PV) manually. For future pricing, the formula is
For the current value, the formula is:
\begin{aligned}&\text{PV}=\text{FV}/\left(1+i\right)^n\\&\textbf{where:}\\&\text{FV}=\textfuture Currency Value\\&\text{PV}=\text موجودہ Current Currency Value}\\&\text{i}=\text{interest rate}\\&\text{n}=\text Number Compound Interest Annual Period\\ \ \ end { align
Apply Net Present Value Calculation
A net calculation of current value can also help you find answers to financial questions, such as determining mortgage payments, or loan interest charged for short-term vacation expenses. By calculating NPV, you can see how much you need to invest each month to achieve your goals. For example, to save $1 million to retire in 20 years, you would have to save $984 per month, assuming a 12.2% annual return.
Below is a list of the most common areas where people use NPV calculations to help them make financial decisions.
mortgage payment
Student Loans
college savings
Home, car or other bulk purchase
credit card
money management
retirement plan
invest
Financial Planning (Business and Personal)
bottom line
Calculating NPV and its variables is a quick and easy way to measure the effect of time and interest on a given amount, whether received now or in the future. This calculation is ideal for short- and long-term planning, budgeting or reference. Keep these formulas in mind when planning your financial future