Question

What factors affect the magnitude of the time value of money?

Answer 1

Answer:- factors affecting the magnitude of the time value of money are as follow-
-Time value of money is the concept that an amount of money in one’s possession is worth more than that same amount of money promised in the future (Garrison, 2006).
-The reason for this is that money today can be invested to earn interest and therefore will be worth more in the future (Brealey, Myers, & Marcus, 2004).
- An annuity is an evenly spaced number of payments or money received in the same amount (Cedar Spring Software, Inc., 2002).
- Each TVM problem has five variables: interest rate or return, time or number of periods, future value, present value, and amount of payments either made or received (Brealey, Myers, & Marcus, 2004).
- The present value of annuity payments received over a number of years is less than if one had the full amount in hand now to invest. The reason for this is opportunity cost.
- If the full amount of the annuity could be invested today in a lump sum, the final value during the same term of the annuity would be much higher due to compound interest.
-   So opportunity cost in this case is the total amount of the annuity payments over the length of the annuity and the value of investing the annuity’s total value today at a specified rate of return.