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Ia havea beena undera aa situationa whena Ia havea useda timea valuea ofa analysisa whena decidinga toa buya
aa cara ora continuea transportationa througha thea publica transportationa .Ia compareda thea overalla neta
presenta valuea associateda witha buyinga outa witha thea cara anda thea neta presenta valuea ofa goinga
througha thea publica transportationa anda thena Ia decideda nota toa buya thea cara becausea ita willa havea
thea Limiteda lifea anda limiteda benefitsa anda thea neta presenta valuea wasa alsoa nota favourablea asa
againsta thea publica transportationa neta presenta value.a Ia havea useda thea neta presenta valuea bya
discountinga alla thea futurea benefitsa associateda witha buyinga outa ofa thea cara anda comparea ita
against,a continuea usinga thea publica transportation.a Casha flowa wasa impacteda duea toa changea ina
thea inflationa anda ita alsoa wasa impacteda duea toa changea ina thea benefitsa whicha werea associateda
ina relationa toa depreciationa anda growtha anda savingsa asa well.a Fora example,a Ia mostlya focuseda
upona thea savingsa duea toa goinga througha publica transportationa insteada ofa cara anda thena
discountinga thosea savingsa ata thea currenta valuea toa arrivea ata decision.a TVMa standsa fora Timea
Valuea ofa Moneya anda ita isa thea concepta thata aa suma ofa moneya isa wortha morea nowa thana thea
samea suma willa bea ata aa futurea datea duea toa itsa earninga potentiala ina thea interim.a Ita isa thea corea
principala ofa finance.a TVMa isa aa verya usefula toola ina helpinga understanda thea wortha ofa moneya ina
relationa toa time.a Aa hypotheticala examplea ofa whena someonea mighta usea TVMa isa ifa someonea
woulda likea toa buya youra tva anda theya cana offera youa $800a fora ita todaya ora $900a ifa theya cana paya
youa sixa monthsa froma now.a TMVa basicallya teachesa usa thata $800a todaya isa isa wortha morea thana
$900a ina sixa months.a Thea TVMa calculationa thata cana bea useda toa supporta thata financiala decisiona
woulda bea PV=FV/(1=r).a Cashflowa hasa aa positivea impacta bya mya decisiona toa takea thea moneya
fora thea TVa upa fronta versesa waitinga 6a monthsa toa takea thea moneya althougha ina sixa monthsa ita
would'vea beena morea moneya fora me.a Ia don'ta knowa whata coulda occura withina thosea sixa monthsa
wherea thea $900a fora thea TVa woulda havea nota benefiteda mea likea thea $800a fora thea TVa woulda
benefita mea upa front.a Timea Valuea ofa Moneya (TVM)a indicatesa thata aa dollara ina handa todaya isa
wortha morea thana aa dollara promiseda ina thea future.a Hypothetically,a ifa Ia inherita $75,000a froma
mya grandmothera anda Ia decidea thata Ia willa nota spenda ita untila aftera Ia graduatea witha aa Master’sa
degreea ina 3a years,a Ia willa needa toa investa ora deposita thea moneya fora thisa three-yeara horizon.a Ia
havea decideda thata oncea Ia deposita thea moneya Ia willa nota toucha ita againa untila thea threea yearsa
havea passed.a Aftera investigatinga 5a differenta banks,a Ia havea 5a differenta interesta ratesa witha 5a
varyinga compoundinga patterns.a
Ia cana usea thea Futurea Valuea Formula,a FVa =a PV(1+i)
n
a ,a toa helpa mea toa analyzea thea investmenta
options.a Eacha timea thea presenta valuea willa bea $75,000.a However,a thea variablea Ia willa bea
adjusteda bya dividinga ita bya thea numbera ofa compoundinga periodsa ina eacha year.a Thea variablea na
woulda havea toa bea adjusteda eacha timea bya multiplyinga ita bya thea numbera ofa compoundinga
periodsa pera year.
Thea casha outflowa ofa $75,000a woulda occura oncea thea computationsa indicatea whicha investmenta
ora deposita woulda givea thea highesta futurea value.a
Ia firsta hada toa understanda whata isa meanta bya TVM,a whicha standsa fora Timea valuea ofa moneya
(TVM)a anda isa thea ideaa thata moneya youa havea nowa isa wortha morea thana moneya youa willa havea
ina thea futurea becausea ofa itsa earninga potential.a Thisa basica financiala principlea statesa that,a ifa
moneya cana collecta interest,a anya quantitya ofa moneya receiveda soonera isa wortha more.a
Personally,a Ia useda timea valuea ofa moneya calculationsa toa makea morea informeda decisionsa abouta
whata toa doa witha mya money;a ita helpeda mea knowinga whata thea besta optiona toa undertakea baseda
ona interest,a risk,a anda ratea ofa return.a Ia investeda $1,000a anda ita earnsa 10%a compoundinga
interesta everya yeara fora fivea years,a thea compoundinga perioda woulda bea onea year.a Thata meansa
ina thea firsta yeara Ia havea earneda $100a ina interesta (10%a ofa $1,000),a ina thata seconda yeara I'ma
earninga interesta ona thea totala amounta froma thea previousa compoundinga period,a whicha woulda
bea $1,100a (thea originala $1,000a plusa thea $110a ina interesta earneda ina yeara one).a Bya thea enda ofa
yeara two,a I'da havea earneda $1,210a ($1,100a plusa $110a ina interest).a Bya thea enda ofa yeara five,a Ia
woulda havea turneda thata $1,000a intoa approximatelya $1,610.a Ana importanta parta ofa financea isa
understandinga fora whata typesa ofa factorsa investorsa requirea compensation.a Aa commona lista
includes:a time,a inflation,a re-paymenta risk,a pre-paymenta risk,a anda uncertaintya risk.a Asa eacha ofa
thesea risea theya willa contributea toa ana increasea ina thea discounta (interest)a ratea useda ina oura TVMa
analysis.a Ifa youa looka ata thea "yielda curve"a fora USa treasurya bondsa youa willa seea thea interesta ratea
thea marketa requiresa steadilya risea froma lessa thana 1%a fora 1a anda 3a montha bondsa toa 4%a fora 20a
anda 30a yeara bonds.a Ifa wea assumea thea marketa believesa thea USa governmenta willa alwaysa paya
thesea moniesa backa (whicha theya will,a sincea thea govermenta coulda simplya printa moneya ifa ita
reallya gota intoa aa bind)a thena thisa differencea ina interesta ratesa ona governmenta bondsa reflectsa
inflationa risksa only.a Thata is,a thesea long-terma investorsa simplya don'ta wanta toa losea theira
purchasinga powera overa time.a Eacha ofa thea riska parametersa I'vea justa mentioneda hasa itsa owna
logica toa helpa "unpack"a howa toa thinka anda estimatea itsa contributiona toa thea denominatora ofa thea
TVM.
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