How to approach time value of money problems
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6 Terms
When should you use FV of a lump-sum?
When you are investing one time, and wish to know the amount in the future.
When should you use FV of an annuity due?
When you plan to deposit the same amount on a periodic basis, and the first cashflow is in the beginning of the period (like today), and you wish to know how much you’ll have in the future.
When should you use present value of an annuity due?
When you plan to deposit the same amount periodically, and the first cashflow is at the beginning of the period (like today), and you wish to know how much you’ll need to invest now.
When should you use future value of an ordinary annuity?
When you plan to deposit the same amount on a periodic basis, and the first cashflow is at the end of the period, and you wish to know how much you’ll have in the future.
When should you use the present value of an ordinary annuity?
When you plan to deposit the same amount on a periodic basis, and the first cashflow is at the end of the period, and you wish to know how much you’ll need to invest now.
How do you recognize a time value of money problem?
If cashflows extend beyond 1 year, then the time value of money will come into play.