Time Value Of Money Real Firm Example Pdf
Time Value Of Money Examples

When you’renegotiatingwith your spouse aboutmoneyissues in divorce, you’ll almost always end up comparing dollars today with dollars down the road. If you’re going to make sense of these issues, you need to understand the time value of money.

If I offered you a $100 bill, would you take it?

Most people would say yes.

What if I offered you your choice of a $100 bill today or the same $100 bill three years from now?

Dec 05, 2018 Time value of money is usually calculated with compound interest. Using the same formula as above to compute the same $2,000 at 10% for one year - but this time compounding interest quarterly,. Time Value of Money Examples Assume a sum of $10,000 is invested for one year at 10% interest. The future value of that money is: FV = $10,000 x 1 + (10% / 1) ^ (1 x 1) = $11,000. PV = 100,000 / (1+10.99/1) (2.1) PV = 81,176.86913 Explanation of the Time Value of Money Formula. The Time Value of Money concept will indicate that the money which is earned today it will be more valuable than its fair value or its intrinsic value in the future.

Most people would say thanks, I’ll take it today.

What if I offered you your choice of a $100 bill today or $200 three years from now?

Time value of money is usually calculated with compound interest. Using the same formula as above to compute the same $2,000 at 10% for one year - but this time compounding interest quarterly,. Jan 24, 2020 The Time Value of Money is a paramount financial concept. A certain amount now is worth more than the same amount in the future. This is because we can invest now and earn a return, resulting in more money in the future. Another reason is that a promise for future cash flows always carries the risk of default.

Most of us would have to stop and think on this one.

Somewhere around there is your understanding of the time value ofmoney, the extra amount you demand if you’re going to have to wait to get money. Why do you demand a premium? Value

You don’t know what $100 will be worth three years from now.
You don’t know if I’ll make the payment three years from now.
You don’t know if I’ll be here three years from now.
You don’t know if I’ll be alive three years from now.
You’d like to take that $100 today, so you can spend it, or invest it, and begin enjoying it.

Our usual way of comparing one stream of payments with another is to discount both streams of payments back to their “net present value,” using a discount rate that everybody agrees is fair. If we use a discount rate of 6% (which is a typical a discount rate used by financial professionals), for example, we can compare three streams of payments that look completely different:

Stream of Payments
Stream Number 1: $10,000 today	$10,000
Stream Number 2: $12,000 5 years from now
Stream Number 3: $200 per month for the next 5 years	$10,345

Now about that discount rate. A 6% discount rate may be appropriate when the collection risk is negligible, that is, when there’s little or no chance that the person required to pay would fail to follow through. Rarely would it be appropriate, however, to use such a low discount rate when the designated payer is an individual (which is usually the case in divorce). In those situations, it might make more sense to use 12%, or even 20-25%. So how would those values look then?

Stream of Payments	NPV	NPV
Discount rate	6%	10%	20%
Stream Number 1: $10,000 today	$10,000	$10,000	$10,000
Stream Number 2: $12,000 5 years from now	$8,967	$7,451
Stream Number 3: $200 per month for the next 5 years	$10,345	$9,413	$7,549

If you study those numbers carefully, a couple of truths should bubble up:

There’s nothing like the safety and security of getting that money today. Not 10 years out, not two years out, not tomorrow; today, please.
How much of a premium you require for waiting to receive money has a lot to do with how much risk you think you’re taking on by waiting. Or to put it another way, how seriously has this person taken his or her financial obligations in the past, and do you have reason that’s going to be better or worse in the future?

This one doesn’t come from the numbers but is an accepted axiom of financial risk: the longer you must wait to get your money, the greater risk you’re assuming (and the higher the discount rate you should use).

To take another issue, if you’renegotiatingwith your spouse about an extra $50 per month ofalimonyfor the next five years, first you need to reduce that payment to account for thetaxtreatment. Let’s say theafter-taxcost or benefit to you is $38 per month. Discounted, say at 10%, that stream of payments is worth $1,788 to you today. Armed with that information, you canthink strategicallyand decide whether it’s worth it to keep fighting about it. Or perhaps you should trade another issue for it. Remember,mooshingis permitted.

Time Value Of Money Real Firm Example Pdf

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Time Value Of Money Examples

Divorce often forces you tonegotiateon the basis of dollars today vs. dollars down the road. You simply must have a good firm understanding of the time value of money if you’re going to negotiate effectively.