Question

For this week think of any example where time value of money is relevant, you can talk about mortgages, car loan, interest rates term structure, leases, retirement planning or any related topic. minimum 200 words

Answer 1

Time Value of Money is important in aspects of raising money along with the future either by savings or by investments.
Money kept in the pocket will be the same today but money being saved or invested shows it's productivity either in the form of addendum of interests, dividends or stock gains etc.

Here we'll choose an example of Retirement Plan to explain the concept of Time Value of Money.

As we said earlier, Time Value of Money is the concept where the money get's increased along with the certain period of time,
this concept will be significant when one wants to save for one's retirement plan.

Now let's assume that you are about to retire 40 years from now, and just for an estimate you'd live 20 years more and you'd need 80,000$ per year.
Let's say we'll invest some of the salary returns into a mutual fund that gives you 12% per year.
We'll calculate how much are we supposed to invest in order to get the 12% returns after the retirement.

We'll now apply the concept of Time value of Money in our retirement plan as below:

So the first step here is, you'd have to decide over how much contributions per period you'd decide to make as per your income.

Present value of retirement withdrawals are:
Time = 20 Years, Payment = $80,000 , rate = 12% , Future Value = 0 (Assume)

Present Value = Cash flow at period of 1/(1+rate of return)^No of periods
= ($80,000/0.12)*[1-(1/1.12)^20]*(1.12)
= (666666.67)*(1-(0.89)^20)*(1.12)
= (666666.67)*(0.89)*(1.12)
= 669,262.15

Future Value for Savings is $669,262.15 an this is the contribution for an ordinary annuity.