time value of money

Time Value of MoneyStudent’s Name
Institution
Time Value of Money
Time value of money is vital to any investor. The idea revolves around a notion that a dollar at hand has more value than a dollar expected to be given in future. Current money is worth more than the same amount at a later date (Mpakaniye,2014). This is due to the fact that a dollar accessible today avails a chance of investing that could result in earning interest. Also, a promised dollar is of less worth due to any loss incurred due to inflation. The earning capacity will depend on the kind of return on investment. Opportunity cost and purchasing power are also essential elements when considering the time value of money. Inflation continually erodes value and the purchasing power of money. What a $1,000 can buy currently will be worth much more in future. By applying the future value of money compared to present value, one can decide on beat investing method.
Although 70% of lottery winners go broke within seven years, with a little financial knowledge on ideal and safe investment, it is possible to make a fortune from the winnings. In case of winning $1,000,000 lottery, receiving the money in one lump sum today would be more beneficial. That is especially if the overtime payment doesn’t incur any interest at all. For example, taking one of the safest ways of investing, that is money market funds. Investing the money at an average interest of 10%, for ten years the total amount received would be $2,593,742.46.

FV= PV*[1+(i/n)] (n*t)
FV=$1,000,000 *(1+(10%/1) ^ (1*10) = $2,593,742.46
FV=Future value, PV=Present value, i= interest rate, n= no. of compounding periods per year, t= number of years
That is more than double the amount to be received if the money is distributed in installments without any incurring interest. Also, considering the high inflation rates, it is likely the value of $1,000,000 will be much less ten years to come. Finally, the risk and uncertainties increase the further into the future payment is due (Mpakaniye, 2014).
Reference
Mpakaniye, D., & Paul, J. (2014). Time Value of Money.