Question.3424 - 1. What are the differences between simple interest and compound interest 2. With regards to money: What are the differences between future value and present value? 3. What considerations do you need to take when considering "time value of money"? 4. Why is the following statement true? "A dollar today is worth more than a dollar tomorrow."
Answer Below:
1) Simple Interest is calculated only on the first outstanding amount, without accounting for any interest that increases over time. The formula for simple interest is I=P×r×tI = P \times r \times tI=P×r×t, in which PPP is the principal, rrr is the rate and ttt is time. In contrast compound interest includes both interest on the outstanding amount and any interest over the years. It is calculated A=P(1+rn)ntA = P(1 + \frac{r}{n})^{nt}A=P(1+nr)nt, where nnn is the number of compounding periods per year. Compound interest is growing at a rapid pace an taking over simple interest because it is based on the increasing interest itself, making it more helpful for long -term investments (Bringham et al.,2021). 2) Future value (FV) is the how money is in an investment that how that investment will increase over a certain period at a certain interest rate. Present Value (PV), constantly displays the current growth of a future amount of money, which is made at a particular rate. Future value take a look at the future growth of money, while present value takes into consideration the flow of cash at its value as of today (Ross et al., 2020). 3. What considerations do you need to take when considering "time value of money"? 3) When considering the money on a time value bases, it is important to take into account escalation, ineterst rates and the motive ad opportunity to invest or spend the amount. Escalation destroys the power to purchase commodities and that may lead to people's money account the purchases for lesser than they should be. The opportunity that cost displays is the future benefits which are gone when choosing one investment over the other (Berk et al., 2019). 4) The statement “a dollar is worth more than a dollar tomorrow" is true due to money value time. A dollar in today's times can be used to earn interest or returns, increasing its future value. Similarly a dollar received tomorrow loses its potential earn time and may not be valuable because of a rise or other economic factors (Bodie et al, 2021). Thus the sooner one has money; the more opportunities come to grow. References Berk, J., & DeMarzo, P. (2019). Corporate finance (5th ed.). Pearson. Bodie, Z., Kane, A., & Marcus, A. J. (2021). Investments (12th ed.). McGraw-Hill Education. Brigham, E. F., & Ehrhardt, M. C. (2021). Financial management: Theory and practice (16th ed.). Cengage Learning. Ross, S. A., Westerfield, R., & Jordan, B. D. (2020). Fundamentals of corporate finance (12th ed.). McGraw-Hill Education.More Articles From Management
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