Discusion Questions for Fin 370 Essay

343 WordsJul 17, 20142 Pages
How do you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How may you use TVM to create your own, or someone else’s, retirement plan? Answer The time value of money (TVM) is used in businesses for the purpose of finding out the suitability of an investment and understanding returns in the context of opportunity costs. It helps us to understand the relationship between the usage of money and the value of returns it provides from a particular venture or avenue based on the time it would take for providing the return and the future value of the return. Opportunity cost is economic decisions based on a limited resources i.e time or money. Opportunity cost is defined as the next best choice available for a person. Opportunity costs are not restricted to monetary costs only. Trade-off is the form of either buying less or a lesser quality item in order to purchase more or a greater quality item. The various considerations made while calculating time value of money (TVM) include considerations about the amount of investment, the time period required to attain the returns, the total returns and the expected future value of those returns along with the net value of the profit or gain earned out of that investment. The time value of money (TVM) can be used to create a retirement plan as it is possible to use this method to find out the future value of the earnings and then be able to invest accordingly. An approximate estimation about the total amount that a person needs in his retirement would help him save and invest accordingly in the current period as then he can go ahead and find out various retirement plans and the percentage of returns that they are offering as well as the appropriateness of payments and other factors. He can then calculate the future value of the investments and find out if it

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