Time Value Of Money Essay Example

and says that he would like to retire in 25 years with one million dollars. He would like to know how much he should invest now to ensure that he has one million dollars at retirement. If the person only intends to deposit money one time, the answer lies in the present value formula. If the person would prefer to make regular deposits, the answer lies in the present value of an annuity formula.

Most businesses use the concept of time value of money in one form or another, as this example observed. Additionally, most people use the concept of time value of money as well, in various forms. Any business or person who has a loan with a fixed monthly payment, like a mortgage or car payment, uses time value of money, for example. Many organizations and their employees deal with benefits, such as mutual funds, retirement plans, education savings plans, equities, municipal bonds, and insurances, that all involve the time value of money. The most common time value of money concepts involved with these benefits are the future value formula and the present value formula.

Time value of money is also important in investments. Investments such as a savings account use the future value of money to determine how much money an investment made today will earn at a specified date.Time value of money is the idea that a specified amount of money received at the present date is worth more than the same amount of money received at a future date. With a five percent interest rate, $100 received today would be worth $105 in one year.

Alternately, $100 received in one year

would only be worth $95.25 today. This concept is important for most businesses and its employees, as well as anyone who invests money, whether the money is used to purchase a car, stashed away in a savings account, or it is invested in mutual funds.