Time Value of Money (TVM)

Properties-February 2016_Page_1

Multi-Tasking Tool

By Alec Pacella
Managing Partner of NAI Daus

Among the favorite memories of my youth were birthday celebrations – most notably, mine. Both of my parents had six siblings and even though all of my aunts and uncles worked hard to make ends meet, they would always remember my birthday.

The gifts were typical fare for that era – Matchbox cars, puzzles and baseball cards. But one of my uncles, Uncle Ralph, would always get me something cool. One year, it was a game program from Super Bowl IX and another year, it was a Guinness Book of World Records. But the one that really stands out was a Swiss Army Knife, a pocketknife that included not only a blade but also a screwdriver, can opener, bottle opener, wire stripper and nail file.

I had never seen anything like it – one tool that could do multiple tasks. This month, we are going to discuss another such tool – time value of money (TVM). TVM has been frequently discussed in this column over the years but typically in the context of determining value or evaluating a loan. And while these two concepts are the “blades” of TVM, this tool can certainly complete many other tasks.

Example #1 – An investor is evaluating the purchase of a cell tower lease. The lease is for five years and the rent starts at $12,000 a year with 2% annual increases. If the investor has return requirement of 9%, what would the investor be willing to pay for this lease?
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