The Time Value of Money (Part 1)
The Time Value of Money (Part 1)
Learning Objectives
1. Calculate future values and understand compounding. 2. Calculate present values and understand discounting. 3. Calculate implied interest rates and waiting time from the time value of money equation. 4. Apply the time value of money equation using formula, calculator, and spreadsheet. 5. Explain the Rule of 72, a simple estimation of doubling values.
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Example 1: Lets say John deposits $200 for a year in an account that pays 6% per year. At the end of the year, he will have: FV = $200 + ($200 x .06) = $212 = $200(1.06) = $212
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Can also be used to calculate the rate of interest needed to double a sum of money by a certain number of years.
For example, to double a sum of money in 4 years, the rate of return would have to be approximately 18% (i.e. 72/4=18).
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OR PV = $24,976.10 x (1/(1+0.09)13=$24,976.10 x 0.32618 = $8,146.67 So, Joannas Dad will have to deposit $8,146.67 into the account today so that she will have her first-year tuition costs provided for when she starts college at the age of 18.
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Table 3.1 Annual Interest Rates at 10% for $100 Initial Deposit (Rounded to Nearest Penny)
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