Wk 2 Discussion – Financial Management Tools [due Day 3]
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We’ve all heard the expression, “Time is money,” and time value of money calculations certainly depict this sentiment.
Respond to the following in a minimum of 175 words:
- Share an example of a situation when you used TVM calculations to support a financial decision either in your professional or personal life. (If necessary, share a hypothetical example of when you might use TVM calculations.)
- Discuss which TVM calculations you used to support your financial decision and the benefits this provided.
- In the example you shared, how was cash flow impacted by your decisions?
The basic idea behind time value of money is that money received now is worth more than the same amount received tomorrow. This is as a result of the possibility of earning interest on investments made with money today.
When I was saving for my wedding, for instance, I utilized the TVM computations to back up a financial choice in my personal life. I presently had $10,000 in savings, most of which came from my parents. After five years, I would need $30,000 to pay for my wedding because I intended to be hitched then. Using the TVM idea I learned in college, I was aware of the following:
Future value = present value * (1+r)^n
Or 30,000 = 10,000*(1+r)^5
Or 1+r = 1.24573
Or r = 24.57%
Therefore, I had to invest my funds such that my compound annual growth rate (CAGR) would be 24.57%. I made the decision to buy mutual funds. Despite the high level of risk, my investment was able to provide a CAGR return of 17%. Therefore, my total was 10,000*(1.175) = 21,924.48. The $8,076 balance gap was paid up using a personal loan.
Therefore, I calculated TVM using the future value formula. I utilized the formula to get my needed rate of return because I had the future value amount, present value amount, and time period. I made a choice that had a real effect on cash flow. Based on the amount I would need in the future, I chose to invest in high-risk mutual funds, which allowed me to build up a respectable sum that was as near to my intended future amount as feasible.