Understand the time value of money

When making financial decisions, do you consider the time value of money? If you have a basic understanding of time-value concepts, you’ll be able to make better choices in many business and personal financial situations.

* Here’s an example. Say you want to sell a piece of property for $10,000 cash. A potential buyer offers $5,000 cash down, and $5,500 one year from now. How does the buyer’s offer compare to your terms?

If you receive the entire $10,000 today, let’s assume you could earn 5% on the money. A year from now you’ll have $10,500, which is referred to as the “future value” of $10,000.

On the other hand, the future value of the buyer’s offer turns out to be $10,750, which is the sum of the payment one year from now ($5,500) plus the future value of the down payment ($5,250). If the buyer has good credit, you may be better off taking the buyer’s offer.

* Calculate present value. Another way to evaluate this kind of offer is to compare the “present value” of both alternatives. Using a financial calculator or special financial table, and still assuming you can earn 5% on your money, the present value of the buyer’s offer is calculated to be $10,238, compared to a present value of $10,000 for a lump-sum cash payment. A higher present value means a better deal for you, so the buyer’s offer is more attractive.

If you’re on the other side of a transaction (buying something), time-value concepts can also help you make better decisions. For example, a time-value analysis can help you decide whether to buy or lease a car. You can also use time value to analyze investment alternatives, negotiate a divorce settlement, or hammer out the best possible deal when leasing real estate or business equipment.

If you’re about to enter into any financial arrangement that requires you to pay money over time, or entitles you to receive periodic payments, time value could be an important issue.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today’s small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it.

Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission.

Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations.

She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.

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