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Week 5: Time Value of Money Concepts
Q.1 What is the difference between future value and present value? What data do you need to do a future value or present value calculation? What are various ways to calculate the time value of money in addition to using the future value and present value formulas?
Q.2 write reply to responses for this article (Lagat)
What is the difference between future value and present value of money? – Discuss
Present value is the sum of money that must be invested to achieve a specific future goal while the future value is the amount of money that will accrue over time when that sum is invested. The future value is calculated by multiplying the present value by the accumulation function.
What real life problems can we resolve using present and future value concept? Discuss
Present and future values are a substitute of Time Value of Money. This is a very important tool used to determine what would be the value of my investments made today after a specific period. This period could be months or years. It takes into consideration future inflation rates expected in the market along with default risk in case of bonds, liquidity risk and others in determining the reinvestment or discount rate. The factors that need to be calculated when calculating either the present value or the future value are cash flows, discounts or reinvestment rate and the time period. The risks associated with the investment should also be considered because it is necessary to compare the risk of two investments which would generate same return over the same period of time and interest rate. For investors, one should choose one which will be beneficial to the company.
Q.3 Write reply to response for this article (Amy)
What is the difference between future value and present value of money? – Discuss
Present value is the current value of money or flow of cash that will be used for future investments. It informs you how much is needed today to earn a specific amount in the future.
Future value tells you how much the specific investment is worth in the future based on an assumed growth rate.
What real life problems can we resolve using present and future value concept? Discuss
The present and future value of money can be a useful tool in making future financial benefits, liability, or investments. For example, should a vehicle be bought with the option of 0% financing or cash rebates? Using the Present Value formula gives a basis to make more educated decisions for the future. These calculating methods are beneficial in risk management, investment analysis and financial planning. Better decision for the future can be made when more accurate information is provided in the beginning.
Q.4 Write reply to response for this article (Hugo)
Difference Between Present Value vs Future Value
Present and future values are the terms that are used in the financial world to calculate the future and current net worth of money which we have today with us. Generally, both the Present Value vs Future Value concept is derived from the time value of money and its monetary concept use by business owners or investors every day. It is a simple idea that whatever money received today is worth more than money to be received one year from now or any other future date. It is important to calculate the time value of money so that the investor can distinguish between the worth of investment that offers them different returns at a different time.
Present Value Present value is nothing but how much the future sum of money worth today. It is one of the important concepts in finance and it is a basis for stock pricing, bond pricing, financial modeling, banking, and insurance, etc. Present value provides us with an estimated amount to be spent today to have an investment worth a certain amount of money at a specific point in the future. Present value is also called a discounted value. It is an indicator for investors that whatever money they will receive today can earn a return in the future. With the help of present value, method investors calculate the present value of a firms expected cash flow to decide if a stock is worth investing in today or not.
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Time Value of Money Concepts