Activity Watch: The Video Titled The Time Value Of Money

E Activity Watch The Video Titled The Time Value Of Money 3

E-Activity--->>> Watch the video titled “The Time Value of Money” (3 min 0 s) from the Teach Me Finance Website, located at, to learn how to calculate the present and future value of money. Be prepared to discuss. From the e-Activity (above), create a personal scenario that exemplifies the time value of money that includes the opportunity cost involved. Describe one (1) real-life example that shows the manner in which a person can use an annuity for retirement planning. A total of 2 paragraphs is needed please(1 per question)*

Paper For Above instructions

The principle of the time value of money (TVM) asserts that a sum of money available today is worth more than the same sum in the future due to its potential earning capacity. This concept emphasizes that money can grow through investment, thus making the present value of money higher than its future value when interest or returns are considered. For instance, if an individual invests $10,000 today in a savings account with an annual interest rate of 5%, in one year, the investment would grow to $10,500. This illustrates how opportunity cost plays a crucial role; by choosing to spend money today rather than invest it, a person foregoes the potential interest earnings. An opportunity cost is the benefits missed out on when choosing one alternative over another, in this case, the benefits of future growth from investing the money now versus spending it immediately. This example highlights the importance of understanding TVM when making personal financial decisions, such as saving or investing for future needs.

Regarding retirement planning, an individual might utilize an annuity as a strategic savings instrument that provides regular income during retirement. For example, a person could contribute a fixed amount annually to a retirement annuity plan starting at age 30 and continuing until age 65. By the time they reach retirement age, the accumulated value of these payments, compounded over the years at a given interest rate, can provide a steady stream of income throughout their retirement years. This disciplined contribution helps in mitigating risks associated with market volatility and ensures a consistent income flow, demonstrating the practical application of annuities to secure financial stability in old age. Using an annuity in retirement planning is an effective way to leverage the time value of money principle, ensuring that the savings grow sufficiently over time to meet future financial needs.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Investopedia. (2023). Time Value of Money (TVM). https://www.investopedia.com/terms/t/timevalueofmoney.asp
  • Moles, P. (2017). Corporate Financial Management (4th ed.). Pearson Education.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Essentials of Corporate Finance (10th ed.). McGraw-Hill Education.
  • Fabozzi, F. J. (2016). Bond Markets, Analysis, and Strategies (9th ed.). Pearson.
  • Investopedia. (2023). Annuity. https://www.investopedia.com/terms/a/annuity.asp
  • Graham, J. R., & Harvey, C. R. (2001). The determinants of corporate leverage. Journal of Financial Economics, 61(3), 3-29.
  • Haugen, R. (2016). Modern Portfolio Theory: Foundations, Analysis, and New Developments. Academic Press.
  • Morningstar. (2022). Retirement Planning Strategies. https://www.morningstar.com

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