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Define Time Value of Money in Real Estate
Time Value of Money:
The "time value of money" is the idea that money you have now is worth more than the same amount of money you'll get in the future. This is because you can use the money now to invest or buy things that could grow in value or help you make more money.
Example:
Imagine you have a choice between receiving $1,000 now or $1,000 in 5 years. If you take the $1,000 now, you could invest it and potentially earn more money over the next 5 years. So, the $1,000 you receive today is worth more than the same amount in the future, because of the time value of money.
"A Deep Dive for Real Estate Appraisers"
When it comes to the time value of money, there are several key concepts and factors to understand:
Present Value (PV): This is the current worth of a future sum of money or stream of cash flows, given a specified rate of return (also known as a discount rate). Present value helps you compare the value of money today with the value of money in the future.
Future Value (FV): This is the value of an asset or cash at a specific date in the future, based on the growth from compound interest or investments. Future value calculations help you determine how much your money could grow over time if you invest it or save it.
Interest rates: Interest rates play a significant role in the time value of money. They represent the cost of borrowing or the return on investments. Higher interest rates increase the future value of money, while lower interest rates decrease it.
Compounding: Compounding is the process by which interest is earned on both the principal (initial amount) and the interest that has already been added to it. The more frequently interest is compounded, the faster your money will grow.
Inflation: Inflation is the rate at which the general level of prices for goods and services is rising, which leads to a decrease in the purchasing power of money. Inflation can erode the value of your money over time, making it even more important to consider the time value of money when planning for the future.
Opportunity cost: This is the value of the next best alternative that you give up when you make a choice. In the context of the time value of money, it represents the potential return you could have earned if you had used your money differently.
Understanding these concepts and factors can help you make better financial decisions and maximize the value of your money over time.
You can use the HP 12C financial calculator to compute the time value of money. The HP 12C has built-in functions to solve for Present Value (PV), Future Value (FV), Payment (PMT), Interest Rate (I/YR), and Number of Periods (n). Here's a step-by-step guide on how to use the HP 12C for time value of money calculations:
Clear the financial registers: Press [f] followed by [FIN] (which is the [PV] key). This clears the financial registers to ensure you're starting with a clean slate.
Enter the number of periods (n): Type in the number of periods, then press [n] (which is the [FV] key). For example, if you want to calculate the future value of an investment in 5 years, type "5" and press [n].
Enter the interest rate (I/YR): Type in the annual interest rate as a percentage, then press [i] (which is the [PMT] key). For example, if the annual interest rate is 6%, type "6" and press [i].
Enter the present value (PV): Type in the present value, then press [PV]. For example, if you're investing $1,000 today, type "1000" and press [PV]. If the present value represents an outflow of cash (like an investment), enter it as a negative value by pressing the [CHS] key before pressing [PV].
Enter the payment (PMT): If there are periodic payments, type in the payment amount, then press [PMT]. For example, if you're contributing $100 every year to the investment, type "100" and press [PMT]. If the payment represents an outflow of cash (like a contribution), enter it as a negative value by pressing the [CHS] key before pressing [PMT]. If there are no periodic payments, skip this step.
Calculate the future value (FV): Press [FV] to compute the future value. The result will be displayed on the screen. For example, if you want to know the value of your investment in 5 years, simply press [FV], and the calculator will display the future value.
Calculate other time value of money variables: To solve for other variables, such as the interest rate, present value, or payment, simply enter the known values and press the corresponding key for the unknown variable.
Remember to use the [CHS] key to enter negative values for cash outflows and positive values for cash inflows.
By following these steps, you can use the HP 12C to compute various time value of money calculations.
"Wit & Whimsy with the Dumb Ox: Unlocking Knowledge with Rhyme:"
In the land where money does grow,
A concept you really should know.
The time value of money, it's called,
A lesson in value, quite enthralled.
The money you have today, you see,
Is worth more than what it will be.
For now, you can invest and make,
A bigger sum, for future's sake.
So when faced with choices to earn,
The time value of money, do learn.
For today's dollars, they're worth more,
Than future sums that lie in store!