Question

Time value of money is an extremely important concept to understand.

1. Would you prefer to have an investment earning 5 percent for 40 years or 10 percent for 20 years?
   1. Explain when the investment opposite your preference would be advantageous.
2. Explain the rule of 72 and give an example of it's application both in your personal life and in the business you work.
3. How are present value and future value related?

Answer 1

I would prefer to have 10 percent for 20 years than 5 percent for 40 yeard due to the present value concept as the value of 10 percent in 20 years will be greater than 5 percent over 40 years.It will also save me with 20 years of time

Investment opposite my preference( 5 percent for 40 years) would be advantageous for the people who are completely risk averse and they want a passive kind of investment.They want a continuous flow of money and no risks and they prefer uniform kind of investment.

Rule of 72 is a way to determine that how long an investment will take to double itself given a fixed rate of annual interest.It is obtained by dividing 72 by annual rate of interest to arrive at a rough period that an investment will take to double itself.

I personally invest in debt mutual funds which return a 6% return so it will take a period of (72/6)= 12 years to double itself.In the business i work they invested into Repos which returned 5% and it will take approximately 14 years( 72/5) to double itself.

Present value is the current value of future cash flows and Future cash flows are value of current flows compounded into a future period so they both are completely dependent on each other for calculation so they are interdependent.