The Time Value of Money

The Time Value of Money

The present value of a single amount has an indirect relationship with future value. Present value shows that a discount rate, or the adjustment to current day??™s value is in effect since the amount is worth less in the present than in the future. Future value is an investment whereas the outlay of money is given a fixed compound interest rate with the expectations of growth in the future. The investment can be a single sum deposited at the beginning of the first period a serious of equally spaced payments (an annuity) or both. Installment payments and leasing are a form of future value. The future value is considered with an applied interest rate. Since money has time value, we naturally expect the future value to be greater than the present value.

Future value of annuity is annuity that consist of a series of equal payments or receipts that occur at evenly spaced intervals. Auto leases and rental payments are some examples of FVA. The payments or receipts occur at the end of each period for an ordinary annuity which they occur at the beginning of each period for an annuity due. The FVA shows how much payments will be worth at a certain time. Calculating future value, it is important to note that the future value of a single amount assumes that the money is shown first. The future value of an annuity for the amount received or paid out occurs at the end of each period and to the end of the next. When determining present value or an annuity the last payment is discounted back and all of the discounted payments are all summed up. The present value of an annuity is used in invested funds.


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