The Value of Money

The Value of Money                                                                                                         1

  The Value of Money                                                                                                                                                                                                            
Robert Johnson
    FIN /200 -   Introduction To Finance: Harvesting The Money Tree
9/09/2011
Instructor: Joseph Lane

The Value of Money                                                                                                         2

Present Value is the value of a single payment of money before it is put into a bank or invested. If your boss gives you the option to take a $10,000 bonus today or giving it to you in one year, if you take the money today $10,000 would be the present value of the money. Once you take that money and invest it in something like a CD that is going to earn you 10% interest a year and you invest that money for five years at the end of the fifth year the money would be worth $10,000 x 1.611 = $16,110. This process is what is known as the future value of money.
The present value of an annuity is when a serious of payments is made to you for the same amount on annual bases. An example of this would be the rent that you pay on an apartment. The lease is normally for a year and the rent is the same amount every month for that year. The future value of an annuity is how the annual payments will grow once if they are invested or put into an interest bearing account. So if your rent was $1,500 a month and your landlord was earning 4% interest on the deposit in 5 years it would be worth $1,500 x 12 x 5.416 = $97,488. At this rate they would earn $7,488 of your rent payments.