Time Value of Money – The concept that money PV = Present value

available at the present time is worth more than PMT = Payment.

the identical sum in the future due to its FV = Future value.
potential earning capacity.
SPREADSHEETS – in business, people generally
Time line – First step in time value analysis. An use spreadsheets for problems that involve the
time value of money (TVM). Spreadsheets show
important tool used in time value analysis; it is a
in detail what is happening and they help
graphical representation used to show the reduce both conceptual and data-entry errors.
timing of cashflows.
GRAPHIC VIEW OF THE COMPOUNDING
PROCESS - shows how an investment grows
over time at different interest rates.
Future Value (FV) – The amount to which a cash
flow or series of cashflows will grow over a
given period of time when compounded at a
given interest rate.

Present Value (PV) - The value today of a future

cash flow or series of cash flows.

Compounding - The arithmetic process of

determining the final value of a cash flow or
series of cash flows when compound interest is
applied.

PROCEDURES IN SOLVING TIME VALUE

PROBLEMS

STEP-BY-STEP APPROACH - Multiplying the initial

amount and each succeeding amount by (1+i)

FORMULA APPROACH
Key Equation:

Compound Interest - Occurs when interest is

earned on prior periods’ interest.

Simple Interest - Occurs when interest is not

earned on interest.

Financial Calculators
N = Number of periods.
I/YR = Interest rate per period.