Lesson 3 4 The Time Value of Money

Lesson 3. 4 The Time Value of Money Introduction Everyone spends money – we buy a cup of coffee, a burger or maybe a magazine What we don’t do is ask our self “what if” “What if” we hadn’t made those small purchases, but had put the money into an interest-bearing account and didn’t touch it for 30 or 40 years There is an “opportunity cost” associated with all spending and the Time Value of Money concept can be used to calculate it February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 1

Lesson 3. 4 The Time Value of Money Objectives You should be able to do the following after completing this lesson • Define the Time Value of Money (TVOM) concept • Explain what the TVOM concept assumes and why it is important • Define the Future Value (FV) of money concept • Demonstrate how to use the FV formula • Define the Present Value (PV) of money concept • Demonstrate how to use the PV formula February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 2

Lesson 3. 4 The Time Value of Money 3. 4. 1 – Interest Review In this section, you will review what you have learned about interest • Two major types of interest – simple and compound • Four major interest rates – nominal, period, effective & APR • The APR represents the true cost of a financial transaction • The time between interest calculations is the compounding period • The compounding period can be annual, semi-annual, quarterly, monthly or daily • To speed up the growth of money – increase the interest rate or calculate the interest more frequently February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 3

Lesson 3. 4 The Time Value of Money 3. 4. 2 – Time Value of Money In this section, you will learn: • Why it is essential to your financial wellbeing to understand the TVOM concept • The value of a dollar in the past • The value of a dollar in the future • The factors necessary to calculate the TVOM February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 4

Lesson 3. 4 The Time Value of Money 3. 4. 3 – The Affect of Time In this section, you will learn: • How you will think of time as you age • Why money increases in value with time • Why time is a critical element in increasing wealth • Why you should start saving & investing early in your career • What happens if you don’t start saving & investing early in your career • What it takes to meet a future financial goal if wait to start saving & investing You will run the following Interactive Example: • Time Value of Money February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 5

Lesson 3. 4 The Time Value of Money 3. 4. 4 – Future value In this section, you will learn: • What the Future Value concept is • The formula used to calculate the Future Value of money • How to use the FV formula to calculate the Future Value of money February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 6

Lesson 3. 4 The Time Value of Money 3. 4. 5 – Present value In this section, you will learn: • What the Present Value concept is • The formula used to calculate the Present Value of money • How to use the PV formula to calculate the Present Value of a future sum of money You will run the following Interactive Exercise: • Present & Future Value February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 7

Lesson 3. 4 The Time Value of Money Discussion Questions What does the Time Value of Money concept have to do with starting to save and invest as soon as you enter the work force? What does the Time Value of Money concept have to do with choosing investments? February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 8