Time value of money is a very powerful concept, especially when considering the difference between present value and future value. For example, one of the wisest investment decisions is to invest money in a way that compounds its value over time. Compound interest is paid on both the principal amount (i.e., the amount of money you put in) and also on any interest you previously earned (i.e., the “interest on interest”). When your interest earns interest, the phrase “your money makes money for you” becomes true. Financial managers not only need to understand these concepts, but must also be able to communicate them clearly to help leadership teams to make better, more informed decisions.
To prepare for this Discussion:
- Consider the following scenario: You are a financial manager, and you want to help your client understand the idea that the money they invest will make more money for them in the future. How can you show your client the benefit of investing their money?
- Review this week’s Learning Resources.
- Post a 150- to 225-word (2- to 3-paragraph) explanation of time value of money related to your client’s investments. To support your explanation, do the following:
- Describe the concepts of present value, future value, and annuities to demonstrate to your client the benefits of investing.
- As part of your response, perform the following calculation: Take $10,000 of (fictitious) purchased stock, choose an interest rate, and calculate the amount of money that your client would have after 60 years if the interest is compounded annually. What would the $10,000 yield in the future?