TIME VALUE OF MONEY

REVIEW OUTLINE
July 26, 2018
1. Why try to understand the time value of
money?
a. Primary goal of management is to
maximize the value of a firm’s stock.
b. Stock values depend in part on the
timing of the expected cash flows from
the stock.
2. Time Value of Money is also called
Discounted Cash Flow (DCF) analysis.
3. Time line: A graphical representation used to
show the timing of cash flows.
4. A peso in hand today is worth more than a
peso to be received in the future.
5. Compounding: The process of going from
today’s values (present values) to future values
(FV).
6. Future Value: The amount to which a
cashflow or series of cashflows will grow over a
given period of time when compounded at a
given interest rate.
7. Formula for computation of FV:
14. Annuity Due: An annuity whose payments
occur at the beginning of each period.
15. Future Value of Annuity Due
FV = PMT ( 1 + i )n - 1 (1+i)
i
16. Present Value of an Ordinary Annuity:
PV = PMT 1 - ( 1 + i ) - n
i
17. Present Value of Annuity Due
PV = PMT 1 - ( 1 + i ) - n (1+i)
i
18. Perpetuity: A stream of equal payments
expected to continue forever.
PV = PMT
i
19. Uneven Cash Flow Stream: A series of cash
flows in which the amount varies from one
period to the next.

FV = PV ( 1 + i )n 20. Solving for the Present Value of an Uneven

Cash Flow Stream
8. Discounting: The process of finding the
present value of a cash flow or a series of 21. How to solve for semiannual and other
cashflows; reverse of compounding. compounding periods:

9. Present Value: The value today of a future 21.1 Convert the stated interest rate (i)
cash flow or series of cash flows. to a “periodic rate”

10. Formula for the computation of PV: Periodic Rate = Stated Rate_____
# of payments per year
PV = FV ( 1 + i ) - n
21.2 Convert the number of years (n) to
number of periods
11. Annuity: A series of payments of an equal
amount at fixed intervals for a specified number
# of periods = number of years
of periods.
multiplied by periods per
year
12. Ordinary (Deferred) Annuity: An annuity
whose payments occur at the end of each
22. Amortized Loan: A loan that is repaid in
period at fixed intervals for a specified number
equal payments over its life.
of periods.

13. Future Value of An Ordinary Annuity

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FV = PMT ( 1 + i )n - 1
i

By: MA Jamis