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8.2
Time Value of Money
P
urpose
The role this topic plays in quantitative reasoning
You may have heard the expression “Time is Money.” This is usually used to convey the idea that
wasting time costs money. But it also might relate to the fact that time affects money. The “time value
of money” means that when you get or give money is as important as the amount of money. What a
certain amount of money will buy today is almost certainly not what that same amount of money will
buy 10 years in the future. Most people would like their money to grow over time, but how is that
possible? Having an account that earns interest is great; having one that earns compound interest is
even better. Earning compound interest over a very long period of time is even more valuable. But as
money grows, inflation decreases the buying power of that money. Knowing whether an investment will
outpace inflation is obviously desirable. (Note that for this activity you will need a scientific calculator
and/or a computer with Excel.)
L
earning Goals
What you should learn while completing this activity
1. Calculate the future value (FV) of an investment that earns simple or compound interest.
2. Be able to determine the amount of money needed at the present (PV) to produce a given amount at a
certain time in the future.
3. Understand what an annuity is and how it compares with investing in a CD (certificate of deposit) or a
savings account.
4. Understand the effects of inflation on your money.
D
iscovery
Finding out for yourself
As you study the websites available at Links A through D on the companion website, think about these
questions:
How does time affect the purchasing power of your money?
What are the differences among investing money with simple interest, compound
interest, or taking your lottery winnings now or in 20 yearly payments?
Is it possible to double your investment with compound interest?
Why do people on a fixed income worry about inflation?
W
hat Do You Already Know?
Tapping into your existing knowledge
1. How does simple interest differ from compound interest?
2. Will your money always grow over time if you invest it in a savings account? In a CD? In an
annuity?
3. What is the purpose of an annuity?
4. How does inflation affect the purchasing power of your money?