# Time Value of Money Paper

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Interest year 1 = p x i x n = $50,000 x .06 x 1 = $3,000

Interest year 2 = (p1 + i1) x i x n = ($50,000 + $3,000) x .06 x 1 = $3,180

The total compounded interest over two years is $3,000 + $3,180 = $6,180. Money has a time value and the value today of future cash flow is referred to as the present value (Brealey, Myers & Marcus, 2003). The present value of a future amount is worth less the longer one waits for it (Brealey, Myers & Marcus, 2003). "The future value is the amount of money that an investment made today (the present value) will grow to by some future date. Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the interest (discount) rate" (Getobjects.com, 2004). In order to calculate each of these two formulas can be used: PV = FV [ 1 / (1 + i)n ] for present and FV = PV (1 + i)n for future; FV = Future Value, PV = Present Value, i = Interest Rate Per Period, and n = Number of Compounding Periods (Getobjects.com, 2004). Once the