Time Value of Money:Future Value

Future Value is the value of money at a specified date in the future that is equivalent in value to a specified sum today.

Future Value – using Formula

FVn = PV (1 + i)^n

Where FV = the future of the investment at n the end of “n” years

i= the annual interest (or discount) rate

n = number of years

PV = the present value, or original amount invested at the beginning of the first year

Future Value Example

Example: What will be the FV of $100 in 2 years at interest rate of 6%?

FV2= PV(1+i)^2 = $100 (1+.06)^2

$100 (1.06)^2 = $112.36

Increasing Future Value

Future Value can be increased by:

• Increasing number of years of compounding (n)

• Increasing the interest or discount rate, (i)

• Increasing the original investment (PV)

Example: Changing I, N, and PV

(a) You deposit $500 in a bank for 2 years … what is the FV at 2%? What is the FV if you change interest rate to 6%?

FV at 2% = 500*(1.02)^2 = $520.2

FV at 6% = 500*(1.06)^2 = $561.8

(b) Continue same example but change time to 10 years. What is the FV now?

FV at 6% = 500*(1.06)^10= $895.42

(c) Continue same example but change contribution to $1500. What is the FV now?

FV at 6% = 1,500*(1.06)^10 = $2,686.27

Time Value of Money: Simple Interest vs Compound Interest

Simple Interest is interest is earned only on principal.

Example: Compute simple interest on $100 invested at 6% per year for three years.

1st year interest is $6.00

2nd year interest is $6.00

3rd year interest is $6.00

Total interest earned: $18.00

Compound Interest is when interest paid on an investment during the first period is added to the principal; then, during the second period, interest is earned on the new sum (that includes the principal and interest earned so far) and so on. In simple interest calculation, interest is earned only on principal.

Compound Interest

Example: Compute compound interest on $100 invested at 6% for three years with annual compounding.

1st year interest is $6.00 Principal is $106.00

2nd year interest is $6.36 Principal is $112.36

3rd year interest is $6.74 Principal is $119.11

Total interest earned: $19.10

Leadership: Nine Traits of Effective Leader.

Figure 2: Universal traits of effective leaders

Studies have shown that there are some traits which commonly and consistently appear in a successful and effective leader, as such, trait theories do have some claim to “universality”. For the theory to be truly universal, all leaders should have to have all the same traits. The above mentioned common traits are illustrated in Figure 2.

Dominance

Dominance is synonym to leadership, the one that every successful leader should have. It is about the willingness and eagerness of taking in charge or being a manager, ahead of everyone else. It is one of the traits on surgency dimension in Big Five Model.

High Energy

High energy in leaders should means that they have stamina to drive and work hard toward achieving a goal, in same time, they be able to tolerate stress as well. Leaders possesses enthusiasm and don’t give up easily and also high tolerance for frustration as they strive to overcome obstacles through proper preparation and anticipation of problems.

Self-Confidence

Self-confidence is about the self-assurance that demonstrated by a leader in making any judgments, decision making, presenting ideas, and showing his capabilities. A leader who has positive self-image and display certainty wills fosters confidence among his followers, gains respect and admiration and very determine to takes on challenges.

Locus of Control

Locus of control is on a continuum between external and internal belief in control over one’s destiny. Internalizers (leaders) tend to be future oriented and believe that they control their fate and that their behavior directly affects their performance. Leaders take responsibility for who they are, for their behavior and performance, and for the performance of their organizational unit. Meanwhile externalizers believe that they have no control over their fate and that their behavior has little to do with their performance. They generally have lower levels of performance.

Stability

Stability is associated with managerial effectiveness and advancement. Stable leaders are emotionally in control of themselves, secure, and always positive. An effective leaders also have a good understanding of their own strengths and weaknesses, and they are oriented toward self-improvement rather than being defensive.

Integrity

Integrity refers to behaviour that is honest and ethical, making a person trustworthy. Many studies show that the ability to influence people is based on integrity. The fact that if a leader found untrustworthy, it is difficult to retain the loyalty of his followers or to obtain cooperation and support from peers and superiors.

Intelligence

Leaders generally have above-average intelligence, that why, a company will seek a graduate from college or university for a management position rather than an average high school leavers. Intelligence refers to cognitive ability to think critically, to solve problems, and to make decisions. There are two most recognize intelligence which as Intelligence Quotient (IQ) and emotional intelligence or Emotional Quotient (EQ). IQ is the ability to think critically and creatively while EQ is the ability to work well with people. There are four components of EQ as follows:

· Self-awareness relates to being conscious of your emotions and how they affect your personal and professional life.

· Social awareness relates to the ability to understand others.

· Self-management relates to the ability to control disruptive or negative emotions.

· Relationship management relates to their ability to work well with others, build effective relationships by communicating, responding to emotions, handling conflict, and influencing others.

Flexibility

Flexibility refers to the ability to adjust to different situations. Effective leaders are flexible and adapt to the situation and possess the ability to influence others bring about change.

Sensitivity to others

Sensitivity to others refers to understanding group members as individuals, knowing their issues, and finding the best way to communicate and influence them. To be sensitive to others requires empathy i.e. the power of understanding and imaginatively entering into another person's feelings.

Leadership: McClelland’s traits of theories of Achievement Motivation Theory and Leader Motive Profile Theory

Achievement Motivation Theory

David McClelland developed Achievement Motivation Theory that stated; people have needs i.e. need for achievement, power, and affiliation; and that person’s needs influence the behaviour and performance of a person and unconsciously motivates us to fulfil that particular needs. Not everyone will have all of the needs, but one of the above three needs tends to be dominant in each one of us and motivates our behaviour. The needs as follows:

· The Need for Achievement (n-Ach) - Is the unconscious concern for excellence in accomplishments through individual efforts. People with strong n Ach tend to have:

o Internal locus of control, self-confidence, and high energy traits.

o Willing to take personal responsibility for solving problems.

o Goal oriented and set moderate, realistic, attainable goals.

· The Need for Power (n-Pow) - Is the unconscious concern for influencing others and very autocratic. People with strong n Pow tend to have:

o Dominance trait, self-confident with high energy.

o Wanting to control the situation, wanting influence or control over others

o Seeking positions of authority and status.

o Ambitious and have a lower need for affiliation.

· The Need for Affiliation (n-Aff) - Is the unconscious concern for developing, maintaining, and restoring close personal relationships. People with strong n Aff have:

o Trait of sensitivity to others

o Enjoying social activities, friendly and care for relationships.

They tend to avoid management because they like to be one of the group member rather than its leader.

The Leader Motive Profile (LMP)

LMP is the predictor to determine the effectiveness of a leader by applying the Achievement Motivation Theories, i.e. a person’s need for achievement, power, and affiliation. Using LMP, McClelland found that effective leaders consistently have the same motive profile which is high need for power, greater than the need for affiliation and with a moderate need for achievement (normally achievement score is between the power and affiliation score). McClelland further identified power as neither good nor bad where it can be used for personal gain at the expense of others (personalized power), or it can be used to help oneself and others (socialized power).

Leadership: Big Five Model

Big Five Model was initially developed by Ernest Tupes and Raymond Cristal (1961) is a comprehensive, empirical and data-driven research finding to identify the traits and categorized it into one of five dimensions which each dimension includes of multiple traits use to describe a person. The dimensions in Big Five Model are surgency, agreeableness, adjustment, conscientiousness, and openness to experience.

Figure 1: The interrelation between five dimensions in Big Five Model approach.

Surgency (extraversion)

The surgency (extraversion) personality dimension includes the trait of dominance which a personality trait of wanting to be in charge or leading, either by influencing others or competing with each others. Someone weak in surgency will become the followers.

Agreeableness

Is the opposite of surgency, where this personality includes traits related to getting along with other people. A person strong in this personality dimension will have behaviour likes warm, friendly and sociable while the weak normally cold, unfriendly and unsociable.

Adjustment (emotional stability)

Traits includes in this dimension are of that related to emotional stability where continuum between being emotionally stable (i.e. self-control, calm and relaxed) and unstable (i.e. out of control, nervous and feeling insecure).

Conscientiousness

The conscientiousness personality dimension includes traits related to achievement. A leader showing tendency for self-discipline, acts dutifully, and aim for achievement are included in this group. Conscientiousness is also on a continuum between responsible or dependable to irresponsible or undependable.

Openness-to-experience

This personality dimension includes traits related to being willing to change and try new things. People strong in this group are intellectually curious, more creative and have unconventional beliefs which contras to the weak who prefer more conventional and traditional interests.