The Time Value of Money, Essay Example

How does the current market rate of interest impact time value of money calculations?

Interest rates are amounts charged on money borrowed. High current market rates of interest mean that the money in the owner’s hand has high value and that the money has low value in the future (Keynes, 2006). The phenomenon is because money has more worth now than in the future (Mishkin, F. S. (2007).

How can this aspect alter your current spending, savings, and budgeting patterns?

The scenario makes me choose to spend money on necessary needs and ensure that I save the extra in banks that offer high rates of current market rates of interest. I will make sure that I spend money on all things needed at present because the money is worth more than in the future, and thus one can purchase many things with it.

How have you previously used the time value of money in your own personal financial planning and/or will plan to use it in the future?

I have been avoiding spending hoping to buy the goods wanted in the future, perhaps when prices come down. However, after grasping the knowledge about time value for money, I will always budget to spend money in present to meet crucial needs so that I can receive value for my money.

What is the Internal Rate of Return (IRR) on an investment and how is this impacted by the Net Present Value (NPV)?

IRR is the rate of interest at which all cash flows’ net present value on an investment equal zero. Kelleher and MacCormack (2004) assert that finance managers use IRR to evaluate an investment’s or a project’s attractiveness. A new project having IRR exceeding an organization’s return rate is a desirable project. Projects with IRR below the rate of return required should be rejected. Projects or investments with high NPV often have low IRR even though their financial impact is significant.

Discuss the possibility of a hybrid institution that embodies the characteristics of a bank and a credit union?

The possibility of a hybrid institution carrying bank and credit union is low. According to Not (2013), banks are after making quick and huge profits while credit unions just like banks provide loans to members, but charge interest at low rates. Credit unions also return to their members surplus income in the form of dividends. These characteristics are hard to merge.

References

Kelleher, J. C., & MacCormack, J. J. (2004). Internal rate of return: A cautionary tale. The McKinsey Quarterly, McKinsey & Co.

Keynes, J. M. (2006). General theory of employment, interest and money. Atlantic Publishers & Dist.

Mishkin, F. S. (2007). The economics of money, banking, and financial markets. Pearson education.

Not, C. (2013). Banks and Credit Unions. Economist, 21(2).