📘 Title: Principles of Finance – Time Value of Money & Investment Decisions Compiled by Rickie
Page 1 – Introduction & Overview
Principles of Finance cover key concepts such as the time value of money (TVM) and investment
decision-making. Understanding these principles helps managers and investors make informed
financial choices.
Importance:
• Assists in evaluating investment opportunities
• Helps calculate the present and future value of cash flows
• Guides long-term financial planning and decision-making
Page 2 – Time Value of Money (TVM)
Definition: Money available today is worth more than the same amount in the future due to earning
potential.
Key Concepts:
• Present Value (PV): Value of money today
• Future Value (FV): Value of money at a future date
• Simple Interest: Interest calculated only on the principal
• Compound Interest: Interest calculated on principal + accumulated interest
Formulas: - PV = FV / (1 + r)^n - FV = PV * (1 + r)^n
Diagram Placeholder: [Time Value of Money Illustration]
Page 3 – Investment Decision Rules
• Net Present Value (NPV): PV of cash inflows – PV of cash outflows; NPV > 0 means investment is
acceptable
• Internal Rate of Return (IRR): Discount rate that makes NPV = 0; higher IRR preferred
• Payback Period: Time required to recover initial investment
Table Example – Investment Decision Rules: | Method | Formula | Decision Criteria |
|--------|--------|-----------------| | NPV | PV inflows – PV outflows | Accept if NPV > 0 | | IRR | N/A | Accept if
IRR > cost of capital | | Payback| Initial Investment / Annual Cash Inflow | Shorter period preferred |
Page 4 – Examples & Applications
Example – NPV Calculation: - Initial Investment: $10,000 - Expected Cash Inflows: $3,000/year for 5
years - Discount Rate: 10% - Calculate NPV → Evaluate if investment is acceptable
1
Page 1 – Introduction & Overview
Principles of Finance cover key concepts such as the time value of money (TVM) and investment
decision-making. Understanding these principles helps managers and investors make informed
financial choices.
Importance:
• Assists in evaluating investment opportunities
• Helps calculate the present and future value of cash flows
• Guides long-term financial planning and decision-making
Page 2 – Time Value of Money (TVM)
Definition: Money available today is worth more than the same amount in the future due to earning
potential.
Key Concepts:
• Present Value (PV): Value of money today
• Future Value (FV): Value of money at a future date
• Simple Interest: Interest calculated only on the principal
• Compound Interest: Interest calculated on principal + accumulated interest
Formulas: - PV = FV / (1 + r)^n - FV = PV * (1 + r)^n
Diagram Placeholder: [Time Value of Money Illustration]
Page 3 – Investment Decision Rules
• Net Present Value (NPV): PV of cash inflows – PV of cash outflows; NPV > 0 means investment is
acceptable
• Internal Rate of Return (IRR): Discount rate that makes NPV = 0; higher IRR preferred
• Payback Period: Time required to recover initial investment
Table Example – Investment Decision Rules: | Method | Formula | Decision Criteria |
|--------|--------|-----------------| | NPV | PV inflows – PV outflows | Accept if NPV > 0 | | IRR | N/A | Accept if
IRR > cost of capital | | Payback| Initial Investment / Annual Cash Inflow | Shorter period preferred |
Page 4 – Examples & Applications
Example – NPV Calculation: - Initial Investment: $10,000 - Expected Cash Inflows: $3,000/year for 5
years - Discount Rate: 10% - Calculate NPV → Evaluate if investment is acceptable
1
