Week 7 Use of Timelines

General Guideline – Use of Timelines

When you begin a time value of money problem, always draw a timeline and mark the cash flows on it. Otherwise, you will invariably get confused and miss a year or something. Here's an example:

Question: If you put $100 into an account paying 10% a year, and left it for 3 years, how much would you have at the end?

Answer: First, draw a timeline and put the cash flows on it:

 

 

Now the scenario is clearly displayed for you, and you can see that to solve the problem you need to calculate the Future Value of $100 invested for three years at 10% interest. Find the solution using the formulas you learned last week:

 

Method 2, use the FVIF Table in the appendix at the back of your McGraw-Hill Create Text:

 

 

Next we will discuss some commonly encountered Time Value of Money scenarios.