 Time Value of Money

 Annual Worth & Future

Worth
 Depreciation
Time Value of Money

Would you rather have $100 now or $200

dollars sometime in the future?

Time Interest
Rate
Time Value of Money

Time is money, and the value of money

depends on time.
Time Value of Money

What’s
better?
or

10%
To take $100 To take $100
today? in a year?

What is the value of $100 today in one year?

Well you could take $100 put into a bank and get that 10%
return, and so the future value of $100 today is a hundred and
ten dollars.
Time Value of Money

Future Value
= $X (1 + rate)^1
of $X in 1 Year

Future Value
= $X (1 + rate)^2
of $X in 2 Years

Future Value
= $X (1 + rate)^n
of $X in n Years
Time Value of Money

You would rather have $100 today since it will

be worth more than $100 in one year

Future Value
= $100 (1 + .1)^1
of $100 in 1 Year
Time Value of Money

Present Value
= $X / (1 + rate)^1
of $X in 1 Year

Present Value
= $X / (1 + rate)^2
of $X in 2 Years

PresentValue
Present Value
== $X
$100
/ (1/+(1rate)^n
+ .1)^1
of $X
$100 inYears
in n 1 Year
= $90.91
Time Value of Money

Would you rather have $100 now or $200

dollars in the future?

Interest Rate = 10%

Present Value
= $200 / (1 + .1)^2
of $200 in 2
Years = $165.29

Take the $200 in the future because the present

value is more than the $100 they will give you today
Time Value of Money

Time and Money are related

Compound Interest

Example: If you needed $200, 2 years

from now, you'd know to put a hundred
and sixty five dollars and change in the
bank and that would eventually become
two hundred dollars in two years.