Time Value of Money

How does the time value of money impact you? Write 800 words about a real or fake situation; write about how you will use the time value of money to solve that situation, and how to financially analyze that situation. Why did you choose said assumptions you did (n, i, and amounts). What would you recommend based on the assumptions determined by you?

For example, imagine you could earn 10% annual interest at your bank. And imagine a friend owed you money. They offered to pay you back $1,000 today, or $1,050 a year from today. Since you could have $1,100 next year if you put that $1,000 in the bank today, should you take the immediate repayment?

When considering the interest rate (i), there are two main factors: risk and opportunity cost.

• Risk: The more risk you take on, the higher return you will expect.Time value of money real-life example, if you put $100 in a bank, you may be willing to accept a $5 return on an investment after a year. This is because the risk that the bank will not repay you is low. If you lend the same $100 to a stranger, you may require a $20 return on investment instead. The person is a stranger. You do not know if they will or will not repay you. To take that level of risk, you require them to pay you $20 extra for the use of your money.
• Opportunity Cost: The opportunity cost is the cost of the benefit that is lost by choosing one option over the other(s). If you have the money available right now, you can invest it immediately, or you can apply it somewhere else. Let’s say you choose to apply it somewhere else. The opportunity cost is the value of the interest you could earn while the money is invested.

Current Market Trend: What would be the current market trend for your scenario and what factors would be influencing the majority of decisions?

Here are some examples – come up with your own

Scenario 1: Congratulations! You’ve finally won the lottery! The lottery commission is giving you a choice of how you would like to be paid. You can either receive $1000 per week for life or an immediate lump sum settlement of $1.5 million. What would be the best option? There is no straightforward answer to this situation. Your answer would depend on a few factors that are specific to your life situation, such as:

• Your age, and your life expectancy. If your life expectancy is short, you may not get the full value of your winnings at $1000 per week.What current investment opportunities are available to you. Taking the lump sum but having nothing to invest it in may not be worthwhile.The stability of the organization making the payments. Will the lottery commission be around “for life”?

Scenario 2: You are receiving a payout which is worth $100 today. This same payout, if taken later, will be worth $110 then. When making your decision, consider the following:

• Where is the interest coming from?
• Where can you invest that $100 today and how much would it be a year from now?

Scenario 3: You’re going to get an extra $1,000 on your CMU student account. There are many things you can do with that money, but you’ve narrowed it down to two choices. Should you invest the $1000 for the next 10 years or use it to pay down student debt today? When you make your decision, you should think about:

• Your current and future mortgage rates.
• The investment opportunities for this money.

You are NOT required to use your real personal finances, but you can if that helps with the assignment.

Submit your text answers and an Excel spreadsheet.