FIN 370/Finance for Business/ Week 2 DQ 3

How would you explain the use of time value of money (TVM) in business? What considerations are
made when calculating TVM? How can you use TVM to create your own, or someone elses,
retirement plan?
The time value of money is an opportunity cost of missing out on the earning potential of investing a dollar
today. Principle 2 states: The Time Value of Money-A dollar received today is worth more than a dollar
received in the future. TVM makes all dollar amounts comparable and establishes either the present value
or a common future date.
Several inputs are considered when calculating the time value of money and the future value of the
investment: number of years until the payment is received (n), annual interest or discount rate (i), number
of times compounding occurs during the year (m), and the present value of the future sum of money (PV).
My employer offers a 401k retirement plan that I have taken advantage of since my first day of working with
the company. I was one of few people in my new-hire training class that did not hesitate to enroll. My
training class was a younger group (21-24 year olds), and they were not interested in planning for
retirement. They were thinking of only the present and what they could do with the additional money in their
paycheck now. I have been with the company for almost 4 years now and the 6% that I have contributed
from every paycheck has been matched by my employer. I recently showed my statement to a few of my
employees that just started and have not enrolled in 401k. They were amazed at how it has grown in just 4
years. I would utilize the compound interest calculation to demonstrate the earning potential of investing
money now and how it will benefit them in several years.
Keown, A., Martin, J., Petty, J., Scott, D. (2005). Financial Management: Principles and Applications (10 th
ed.) Prentice Hall, Inc. A Pearson Education Company.