Time Value of Money TVM a fundamental principle NPV IRR ARR

Time Value of Money TVM a fundamental principle NPV IRR ARR

According to Medeiros, the Time Value of Money (TVM) is a fundamental principle in everything from investing to purchasing. It affects you, today, in practical and real ways. Money loses its value over time which makes it more desirable to have it now rather than later. Why?

Time Value of Money (TVM) is a fundamental principle

According to Medeiros, the Time Value of Money (TVM) is a fundamental principle in everything from investing to purchasing. It affects you, today, in practical and real ways. Money loses its value over time which makes it more desirable to have it now rather than later. Why?

Firstly,  Immediate earning potential. You can also immediately generate interest today if you invest today.

Secondly, Lower risk. Money in hand today is a sure thing. It eliminates other risks, like default risk, which is when you are promised money in the future, and someone doesn’t pay up — such as that friend you lent money to and who still hasn’t paid you back.

Thirdly,   Opportunity costs. These are essentially choices you give up to do something else. Further, When you decide to wait one year to get your money, the opportunity cost is the years’ worth of lost interest that you gave up to wait for it (link (Links to an external site.)).

For This Week’s Discussion

Let’s choose from some practical, real-world examples of the importance of TVM. From the list below, choose one scenario to discuss. Each scenario gives you two potential decisions to make. Choose one decision and provide rationale for 1) earning potential, 2) risk, and 3) opportunity cost.

Scenario 1:

Choosing Your Lottery Pay-out
Congratulations! You have won the $500M Power Ball jackpot! You have two options for payment: 1) Take an immediate lump sum today with substantial tax implications; 2) Take 30 years of future annuity payments with far less tax implications.

Scenario 2:

Designer Shoe Purchase

The amazing pair of shoes you’ve had your eye on are FINALLY on sale. You have to have them. Do you: 1) immediately pay for the shoes with cash, or 2) charge the shoes to your credit card? Remember, make a TVM argument.

Scenario 3:

Professional Athlete Contract
You are an NFL running back going into your fourth season with the team. Your agent and the owner have negotiated two options for a new contract; each contract has injury clauses associated with them which could impact your total pay if you get hurt. 1) Sign a three year deal at $20M/year with a $1M immediate signing bonus, including end-of-season performance-based bonuses of an additional $5M; 2) Sign a one-year deal at $14M, which includes a $4M immediate signing bonus.