Tmv

Introduction

The Time Value of Money (TVM) concept can be briefly described as money that is available at the present is worth more than the same amount in the future due to its potential capacity to earn interest. Over time, that money will increase in value because of savvy investing practices that provide an opportunity to earn interest on the interest known as compound interest. Compound interest is the basic investing and banking concept that the principal plus interest earns interest thus increasing the value of the money invested. Good investment strategy weighs heavily on the interest rate which plays a major role in determining return on investment. With a higher interest rate, the return on investment increases which provides more money to the investor.

When businesses develop strategies to increase its net worth or capital, a determination must be made on how much money is needed to achieve their financial goals. Present value of money should be evaluated to ensure that the original investment can be increased due to interest that it will earn over time. The basis for this concept relies on the idea that more money that is invested, more money will be earned in compound interest during the life of the investment. By understanding the present value of money, the financial goal or future value of the money invested can be determined based on the interest rate, span of the investment, and potential annuities. In the decision-making process, investors should look at all aspects of the investment and associated risks while focusing on its financial goals. The decision-making process provides the opportunity to investigate the best investment that will yield the greatest financial benefit.

Opportunity cost is important to TVM for it requires an in depth analysis of the goods or service offered by lenders who will provide the best rate of interest or return, therefore, increasing the future value of money. For example, a business has the choice of investing in various funds, one with 3% interest rate over a period of seven years, and one with a 6% interest rate over a period of eight years. The business has the choice as to what investment is the best financial opportunity for it to take (Brealey, Myers, Marcus, 2003). Any decision that involves the choice between two or more options is an opportunity costs and not understanding what opportunities exist can be costly to an investor.

The quote from Albert Einstein, “The most powerful force in the universe is compound interest,” defines the Rule of 72 which is 72 divided by interest rate return equals the number of years for an investor’s money to double. Without the rate of interest and following TVM, there would be no opportunity for the money to increase. Investors need to understand Rule of 72 to take advantage of financial investment opportunities to achieve