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Time Value Of Money

Time Value of Money (TVM) is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. Stockholders will pay more for an investment that promises returns over 1 to 5 years than they will pay for an investment that promises identical returns for 6 to 10 years.   TVM is based on the concept that a dollar that you have today is worth more than the promise or expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest. (Gallager, 1996) For example you could invest $1 at a 7% annual interest rate. By the end of the year your balance will be $1.07. It can be said that the future value of the dollar is $1.07. The present value is $1. In this paper, we will review the mathematical tools needed to make the best decisions for our money.
There are two types of interest, simple or compound.   Simple interest is where interest earned is not added back to the principal. For example, you deposit $100 at a 10% simple annual interest rate for 3 years.   At the end of the first year the balance will be $110. To calculate the second year’s interest will be calculated on the original principal amount of $100.   Compound interest is calculated on the original principal and all of the interest accumulated in past periods. (Getobjects, 2004) So at the end of year one, the balance will be $110. With compound interest the $110 will become the new principal balance. The end of year two balance will be $121.  
Opportunity cost is the loss of potential gain from the best alternative to any choice.   In other words opportunity cost is the cost of pursuing one choice instead of another. (Getobjects, 2004)   Opportunity cost should just not be assessed in monterary terms but in the terms of anything that holds value to the person doing the assessing.   For example, if there are movies that are being...