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How do you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How may you use TVM to create your own, or someone else’s, retirement plan?

In a nutshell, time value of money (TVM) can be explained as if you were to receive money today and it is worth more than the same dollar amount if it were received a year from now. Basically, the value of money becomes less over time. The use of TVM in business is crucial because it assists people in making investment decisions and choose alternatives that have varying cash flow patterns over time.

Considerations that should be made when calculating TVM are Interest rate, period of time, present value/future value, knowing the future value can help answer the question on how much money deposited today be worth in the future at a given rate, how compound interest which occurs when interest is paid on an investment during the first and second period works, and cash flow amount per period (payment) should also be considered when calculating TVM. The cash flow amount can be either positive or negative; positive cash flows are called cash inflows and negative cash flows are called cash outflows.

You can use TVM to create a retirement plan by calculating what they will or may earn over a long period of time, given the number of periods, interest rate, present value, payments (if applicable),and future value. The formula would be

FV = PV (1+i)N

A TVM calculation can also be used to calculate the Present Value of an annuity that will pay out a certain amount monthly for a specific amount of time or it could be used to calculate how much must be saved to reach that amount in that time.

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