Time-Value-of-Money means that money at hand at the moment is worth than that earned or gained in the future. This is because money at hand can be invested in various ventures which can then ensure returns. Closely related to the above, money that is not at hand can be viewed as lent money, which is exposed to economic risks such as inflation and default risks(Chan & Rate, 2018). A few concepts related to the above aspect are present and future value as well as the interest of the sum of money in question. When a value that can be received at a later date is discounted to reflect what can be received at the moment, the amount is termed as present value. On the other hand, the future value is as a result of the enhancement of the current value. Interest is the extra money on top of the initial that is earned after lending an institution or individual a sum of money for a given period of time. In addition to the three factors mentioned above, the number of years and compounding periods within the time the money is held are crucial factors in deciding the time value of money (Delaney, Rich, & Rose, 2016). An example of the above in real life is deciding to receive a huge amount of work benefit currently and investing in the stock market after analyzing the risks involved over the investment period. On the same, the decision could be keeping the same amount in a bank account with great interest rates to earn the expected rates before withdrawing the sum. Working with the assumption that reasonable financial risks have been taken into account, the benefits are likely to be more than deciding to be given the same amount at a later date.
An annuity can best be described as a stream of money for a certain period at regular intervals. There is future as well as present value for an annuity. In deciding whether to take a lump-sum amount of money or opt for a 10-year annuity after winning a lottery, there are a few critical factors to consider. One of the most is the financial risks that are involved in taking the amount and investing in any venture. Another consideration is the calculated value of the annuity in the present and in the future. On the above two related concepts, the most important consideration is the rates that are offered for each annuity period. If the end calculated value of the annuity chosen is possibly higher than the amount earned after taking the risk of taking and investing a lump sum amount of money, then, the decision to take the annuity would be the best. Other factors that could be in the picture are the ability of one’s family to collect the annuity benefits in case of one’s death, financial flexibility that comes with either the lump-sum amount or the annuity and the tax on the annuity amount. Specifically, in the case of a lottery, due to the high possibility of less tax and a larger amount of money in the stipulated period, it would be wise to opt for a 10-year annuity (Matheson, Victor & Grote, 2003). On the other hand, however, it is wise to consider life expectancy as dying before collecting the whole amount does not guarantee the immediate family the benefits that an individual was to receive. Generally, TMV will help in making the decision through the consideration of all the benefits gained in choosing to receive the amount at once. It will help in scrutinizing the risks involved in the whole process and hence, will probe me to think more widely and look at all the factors that might come into play in the future that might derail me from receiving higher returns in the case that I choose a ten-year annuity.
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References
Chan, K., & Rate, E. A. I. (2018). & 6 The Time Value of Money. Financial Management .
Delaney, C. J., Rich, S. P., & Rose, J. T. (2016). A Paradox within the Time Value of Money: A Critical Thinking Exercise for Finance Students. American Journal of Business Education (AJBE) , 9 (2), 83-86.
Matheson, V. A., & Grote, K. R. (2003). Jacking up the jackpot: are lotto consumers fooled by annuity payments?. Public Finance Review , 31 (5), 550-567.
