Factors That Affect the Time Value of Money - 1100 Words

Factors that Affect the Time Value of Money Time value of money is the concept that an amount of money in one s possession is worth more than that same amount of money promised in the future (Garrison, 2006). The reason for this is that money today can be invested to earn interest and therefore will be worth more in the future (Brealey, Myers, Marcus, 2004). This paper will explain how annuities affect time value of money (TVM) problems and investment outcomes. In addition, this paper will briefly address the impact of interest rates, present value, future value, opportunity cost and the rule of 72 on the time value of money. Annuities An annuity is an evenly spaced number of payments or money received in the same amount (Cedar†¦show more content†¦People and investment advisors often talk about doubling their money. The rule of 72 says that the time it takes and investment to double is approximately equal to 72 divided by the interest rate expressed as a percentage (Brealey, Myers, Marcus, 2004). For example, take the above example where a person received $12,000 from a rich aunt. How long would it take for that investment of $12,000 at 8% to double? It would take approximately 72/8 or 9 years to double in value. This formula works best with relatively low rates of interest and gives a close approximation of the length of time it take for money to double in value at a fixed interest rate (Brealey, Myers, Marcus, 2004). Conclusion Money is more valuable when it can be invested and earn interest than if that same amount were promised in the future. The time value of money is the basis of finance and investing. The concepts that affect the time value of money are important to understand whether it be a business manager or a household manager. These ideas and concepts are so important in today s climate of disappearing pensions, uncontrolled government spending and the likelihood that social security will not be around in 30 years. Steps should be taken to ensure that the nation s children are taught these concepts in high school and college, so that the next generation will be prepared to manage their own financial well being. References Brealey, R. A., Myers, S. C., Show MoreRelatedThe Internal Influential Factors That Affect College Students Financial Investment Tendency Essay1025 Words   |  5 PagesAnalysis on the internal influential factors that affect college students financial investment tendency 1. Introduction: Investment can be used to refer to any mechanism used for the purpose of generating future income. In an economic sense, an investment is the purchase of non-monetary asset that are not consumed today but are used in the future to create wealth, such as education investment. 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