Writing Assignment Paper About Time Value of Money (Essay Sample)

Time Value of Money
Student’s Name
Institutional Affiliation:
Part 1
* In the determination of the present value of the liability which is supposed to be 2 million in 10 years, we use present value interest factor (PVIF) at a discount rate of 5% for ten years.
PVIFA=(1+r)n
PVIFA=(1+0.05)10
Present Value of Annuity =Future Value / PVIFA
= 2,000,000/1.628894627
= $ 1,227,826.51
* When money is payable at the end of each year, it is called ordinary annuity. As time goes, interest is earned on savings already made from year to year. Thus, the first amount saved will earn interest for nine years while the next will earn it for the next eight years. It implies that the last amount saved will not earn any interest because money is saved at the end of each year. According to Xingyun (2015), the future streams of savings that need to be made at the end of each period is obtained as follows:
P= r(PV)1-(1+r)-n
Where P= amount of each payment of annuity, PV= present value of annuity, r= interest rate, and n= the number of periods
P= 0.05(1,227,826.51)1-(1+0.05)-10
P= $ 159,009.15
Part 2
Time value of money is widely used in the commercial or financial sector. A good example is in a mortgage. Payments towards the same are made in such a way that at the end of a specified time limit, a certain amount of money should have been paid in exchange of a facility, usually a house, which best fits annuity payment.
In this regard, the specific business decision that the organization made is the strategic decision. These include making choices on the matters that directly touch on the survival of the institution. For instance, they decided to make periodic savings to pay off the liability that the business would face in ten years' time. By knowing that they required two million dollars at the end of one decade, it was not just a matter of setting aside contributing two hundred million annually, but instead, an amount that would earn interest and give th...