Summary Time Value of Money

MODULE 4: TIME VALUE OF MONEY, DISCOUNTED CASH FLOWS & VALUATION


Time value of money
 Concept that money today is worth more than money in the future because:
1. It can be invested to earn interest
2. It can be spent before inflation reduces its buying power
3. It has no uncertainty regarding its receipt in the future

Terms
 Single amount: lump-sum received today or at a future date
 Annuity: series of equally spaced and level cash flows
 Mixed stream: stream of unequal periodic cash flows or a stream of cash flows that
IS NOT an annuity
 Principal: amount/original investment on which the interest is paid
 Simple interest: amount of interest paid on the original principal amount only
 Compound interest: simple interest and interest-on-interest earned in a prior period
 Compound growth: occurs when the initial value of a number increases or
decreases each period by the factor (1 + growth rate)

FORMULAS
FUTURE VALUE 𝑖 𝑛𝑚
𝑃𝑉 × (1 + )
𝑚
PRESENT VALUE 1
𝐹𝑉 ×
(discounted value of future cash 𝑖
(1 + 𝑚)𝑛𝑚
payments)
FUTURE VALUE 𝑃𝑉 × 𝑒 𝑖𝑛
(continuous compounding)
COMPOUND GROWTH 𝑃𝑉 × (1 + 𝑔)𝑛