## Different Types of TVOM

### Practice

To solve each problem follow these steps:

1. Create a time line
2. Identify type of cash flows and
3. Identify the appropriate equation needed to solve a problem.

Note: The solution to each problem is given.

#### Practice Question 1:

Tyler won a lottery. The commission asked him to choose between \$10,000 today and \$20,000 three years from today. Which option should Tyler take if his investment opportunity is 10% annually compounding?

#### Solution:

\$10,000 is today's value while \$20,000 is the value three years from today. In order to choose between these two options, you need to convert \$20,000 to be today's value so that it can be compared to \$10,000.

Step 1- Create a Timeline: Step 2- Identify the type of cash flow: Since \$20,000 is only one cash flow amount on the time line, the type of cash flow is lump sum.

Step 3- Select the appropriate equation: We can also see that the present value of \$20,000 is needed. The equation for the problem is present value of lump sum: Step 4- Enter the variables in the equation and solve: FV = \$20,000 (value at the end); r = 10% (investment opportunity); t = 3 (compounding periods) 