READ

Prior to participating in the discussion be certain you have:

• Consider what you have learned so far about the Time Value of Money.
• Read the Time Value of Money Basics (TVM) module.
• Read the content and watch the video on the Week 3 - Introduction to Time Value of Money page.

RESPOND

In your main discussion posting, please address these following three discussion points:

• In your own words, describe the concept of Time Value of Money (TVM).
• Discuss an example of how TVM would be used in the workplace.
• Describe how you might use the concept of TVM to prioritize projects and make decisions in regard to corporate finance.

Week 1 - Time Value of Money Basics One of the most important concepts in finance is the time value of money (TVM). This is the idea that the value of a dollar to be received at some point in the future is worth less than the value of a dollar on hand today. One reason for this is that money received today can be invested into an interest-bearing account or a financial investment instrument, thus generating more money in the form of interest or dividends. The concept of the time value of money can affect us in our normal daily financial lives and can help us in making several important financial decisions such as; what bank account to open, what mortgage banker to use, which loan or mortgage agreement to enter into, which financing agreement to accept, what interest rate to charge for a loan you make, etc. Time Value of Money Considerations Another consideration of the time value of money is that when people choose to receive a sum of money in the future rather than today, they are effectively lending the money (someone else will have the use of it). There are risks involved in any lending activity, such as default risk and inflation. Default risk arises when the borrower does not pay the money back to the lender, while inflation risk refers to the rise in general price levels of goods and services. The time value of money principle also applies when comparing the worth of money to be received in the future and the value of money to be received further out into the future. In other words, the TVM principle says that the value of a given sum of money to be received on a particular date is worth more than that same sum of money to be received at a later date. Basic Terms Used for Time Value of Money Discussions Click through the tabs to read the terms used when calculating and discussing the Time Value of Money (TVM). Present Value Future Value Interest Compounding Present Value When a future payment or series of payments are discounted at a given rate of interest, up to the present date, to reflect the time value of money, the resulting value is called present value. Application of Time Value of Money Principle As mentioned above, there are many practical applications of time value of money principle. For example, we can use it to compare the value of cash flows occurring at different times in future, to find the present worth of a series of payments to be received periodically in the future, or to find the required amount of current investment that must be made at a given interest rate to generate a required future cash flow