Response Guidelines- Time Value of MoneyRespond to at least two peers (see attachment). Your responses should be substantive and could involve one or more of the following:o Debate the topic.o Ask a
Page 1 of 3Time Value of Money Response Guidelines Respond to at least two peers (see below). Your responses should be substantive and could involve one or more of the following:
o Debate the topic. o Ask a probing question. o Share an insight you gained from your peer's post. o Make a suggestion. o Share a personal experience related to the topic. o Expand on your peer's post. The replies should be at least 50 words minimum Student 1 Define and discuss the importance of the time value of money concepts, including compounding (future value), discounting (present value), and annuities. ·The financial concepts of time value of money, are integral knowledge blocks for understanding, not just the study of finance, but company and personal wealth. These concepts center around loans and investments, much of which is the core of determining our own trajectory financial health, freedom, retirement or all the above.
· Future value provides insight into when, if at all, an investment will expected to be of significant value.
· Present value is important because it is key to determining how much investment one would have to make in order to achieve a desired dollar potential.
· Annuities are most commonly associated with retirement payouts. Since this financial component is a structured regular payment cycle, it’s a drawback is the difficulty of accessing the finances.
Why would you as an organization leader need to understand these concepts? ·Depending on your leadership role, understanding these concepts would be very integral to the security of your career and its trajectory. These aspects are paramount to determining whether a return on investment to an idea or project could be feasible or of high-value to the company. Page 2 of 3· From a personal wealth perspective, I think the marginal confidence in knowing whether or not you could read financial data and determine whether an investment may be risky or have high-potential, is a necessary skillset.
Reference:
Ross, Stephen, Westerfield, Randolph, Jeffrey, Jaffe, Jordan, Bradford.
(2018). Corporate Finance: Core Principles and Applications, 5th Edition. [Vitalsource]. Retrieved from https://online.vitalsource.com/#/books/1260384357/ Student 2 Compounding (future value) is very important to the lender in regards to the time value of money. This is important because it is the, “process of leaving the money in the financial market and lending it for another year” (Ross et al., 2018, pg. 86). This means that when a lender lends a certain amount to a borrower for a year, interest builds. The lender then allows the borrower to borrow it again, which allows the lender to gain interest on their interest from the previous year. “Benjamin Franklin’s statement, “Money makes money and the money that money makes makes more money,” is a colorful way of explaining compound interest” (Ross et al., 2018, pg.
87). This means that money makes money (interest) and that interest (money) makes more money (interest).
Discounting (present value) is also important to lenders in regards to the time value of money. Discounting is the opposite of compounding in which it is the, “process of calculating the present value of a future cash flow” (Ross et al., 2018, pg. 91). This means that the lender would calculate how much is needed for the loan today so that they can gain a certain amount when the loan expires. In order for this to benefit them, the lender has to be aware of the current interest rate.
Annuities are essential to lenders because this is, “a level stream of regular payments that lasts for a fixed number of periods” (Ross et al., 2018, pg. 104). This allows lenders to receive payment on their loan during its time. Annuities also allow the lender to see what the present value of their loan is.
An organization leader would need to understand these concepts because they are essential to getting a loan. If an organization leader is contemplating on getting a loan then by having the knowledge of compounding, they will be able to know the amount they will owe on the loan. This will allow them to make an informed decision in which they may prevent future debt. Both compounding and discounting are essential to the knowledge of an organization leader because they allow the Page 3 of 3leader to know whether they should get a loan or not. Annuities are important for the organization leader because it allows them to know what the payment will be.
References Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2018). Corporate Finance: Core Principles and Applications. (5th ed). New York, NY: McGraw-Hill Education.
