Question

Prompt: Identify a situation or strategy to use Time Value of Money or Interest Rates to capitalize on an opportunity. This can be personal, professional, or ways a company can benefit. Describe the situation or strategy and demonstrate how it's beneficial.

Answer 1

Time Value of Money is the concept that the value of a dollar today is less than that in the future. One of the key was in which time value of money can be used is the effect of compounding.

Consider a situation where you want to by a car in 5 years. You can either start saving for 5 years and take the car or you can take a loan and purchase the car.

Lets Assume Cost of Car is $500,000

Expected Annual Returns (%) 12%

If we make a SIP for $6100 monthly for 5 years based on computing we can save for the same

Expected Amount       $ 503167 ($500000)

Amount Invested        $366000 ($370,000)

Wealth Gain $1,37,167 ($140,000)

However if we take a Car Loan

Payment Every Month  $9,659.49

Total of 60 Payments  $579,569.10

Total Interest $79,569.10

Thus we can se that it is advisable to use time value of money to our advantage.