The time value of money in our personal lives
Respond to the following in a minimum of 175 words:
1. Many of us apply the time value of money in our personal lives; for example, when we invest dollars in a young child’s bank account earmarked for his or her eventual college education. Share an explanation of the time value of money in your own words. What criteria do accountants use to decide whether to use present or future values in accounting statements?
2. Money is very value. Like an old saying says, “ Money is the root of all evil”. Money controls the way people think, maneuver, and profit. In this chapter reading, time value of money has been a powerful topic. Time value of money is money available at the present time that is worth more than the identical sum in the future. This is due to the current earning capacity that may not be worth the same in the near future. The value of the dollar may not be worth the same in the future due to changes in expenses, cost value, and an increase in environmental growth.” Present value is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.” Future value is basically time value of money and the need for charging or paying additional risk-based interest rates.
Reference:
https://www.investopedia.com/terms/p/presentvalue.asp
3. Money is always stronger the sooner it is received. The general concept is observed weekly with lottery winners who have the option of taking cash today at a discounted price or at a larger amount at some future date. While I never took the time to calculate the future and present value of lottery winnings logic tells me that the winners come out ahead of the game even after taking the tax hit by taking the cash today.
The idea is that I can best invest money today then a promise in the future. The potential at compounding interest on a deposit today is greater then what I suspect is a low rate of gain or return by taking installments. When you think about it, I don’t recall ever hearing a lottery winner not take the lump sum payments.
In my line of work, we have actuaries that work with the numbers to determine what a future benefit may be for example should a life insurance policy exist today. It gets complicated when a man (or woman) age 25 buys a million-dollar life insurance policy at $10 a month. Compare this to a 6o year old man who pays $500 a month for the same policy. In this example the risk taken by the insurance company is valued. While ether person could expire tomorrow what is more likely to happen and affect the risk reward the insurance company will consider.
I recall being a young boy and the insurance man came to my parents home. My dad who may have been 50 at the time, drinker, smoker, diabetic, and had high blood pressure. The insurance company would not provide him an insurance policy at a rate my parents could afford.
Accounts review the risk, rewards, and benefits by considering the present or future value along with the risks in the decisions made. When a company is considering an investment they are very concerned with the expected return. Would the company make more money through compounding interest or would they do better by making an equipment purchase? Sometimes the company may lose their shirt. RR Donnell y invested millions in plant equipment to print World Book encyclopedias. The following year World Book started shipping CD’s. woops. Not a smart investment but what do you expect from a 100+ year old company!
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