Week 3 complete | Business & Finance homework help
Money has a “time value” because it is more valuable when received sooner rather than later. Money can be invested to earn interest, meaning that money received today will be worth more in the future due to compounding returns. This means that if an investor receives $1,000 today and invests it at 5% for 10 years, they will have earned $650 in additional income by the end of those 10 years compared to waiting until year 10 to receive the original amount without any accrued interest (Melicher & Norton 2016). Hence, this concept of time value explains why money held now is typically worth more than its equivalent in the future due to potential growth or return on investment opportunities.
The saying “time is money” refers to how both are resources with finite availability; essentially suggesting that while one cannot create either resource, certain investments can make them much more valuable over time (Melicher & Norton 2016). In terms of the concept of time value of money, this implies understanding which investments may yield higher returns depending on a particular timeline. For example – investments with longer maturity dates usually carry higher risks but also promises greater rewards compared to short-term investments with lower risk profiles but smaller returns. Therefore, depending on an individual’s appetite for investment risk and their financial goals related timeline , investors must understand how best use their capital ‘s finite “time” maximize return .
The Future Value (FV) of $5,000 invested at 5 percent for 10 years would be equal to $9762.71; whereas the FV for 7 percent rate compounded annually for 7 years would be equal to $7269.95 ; and finally 9 percent compounded every year 4 year period =$ 6686 76 ( Melicher Norton 2016 ). In other words total amount expected after respective periods amounts specified assuming no withdrawals made during stated durations . Melicher Ronald W Edgar A Norton Introduction Finance Markets Investments Financial Management EnhancedText Wiley Global Education US 2016 [Savant Learning Systems]
Present Value equals what someone willing pay current dollars exchange something promised sometime future which discounted back present day valuation discount rate employed determine level deemed necessary compensate sacrificing buying power dollar today investing instead immediate gratification savings account receives fixed rate interests regularly supplied balance addition periods grows exponentially calculated using formula P= Fv/(1+r(n))^t where P stands Present Value Fv stands Future Return r stands Interest Rate n denotes Number Periods t signifies Length Timeframe.
For example present value 5000 paid end 10th year given 5 % discount measure equals 3444 37 whereas same exact situation applied comes 7000 end 7th year precise same mentioned above caps off par 2590 20 3000 promised conclusion 9th employing 9 % applies 2360 59 equation detailed prior further details . Finally Return Investment ROI costs 500 bring 800 fourth ending four 85 percentage points determined utilizing calculation 500/800 = 0 85 * 100% = 85% increase initial principal invested. Melicher Ronald W Edgar A Norton Introduction Finance Markets Investments Financial Management EnhancedText Wiley Global Education US 2016 [Savant Learning Systems].