Time Value of Money

The Role of Time Value of Money in Finance

Most financial decisions involve

costs & benefits that are spread out
over time.

Time value of money allows

comparison of cash flows from
different periods.

TIME VALUE OF MONEY refers to the

observation that it is better to
receive money sooner than later.
 A peso in hand today is worth more
than a peso to be received in the future
because if you had it now, you could
invest it, earn interest, and end up with
more than a peso in the future.
 TIMELINE
Depicts the cash flows associated
with a given investment. It can be
used to depict investment cash flows.
 FUTURE VALUE
The amount to which a cash flows or series of
cash flows will grow over a given period of time
when compounded at a given interest rate.
 PRESENT VALUE
The value today of a future cash flow or
series of cash flow.
 COMPOUNDING
The arithmetic process of determining
the future value of a cash flow or series
of cash flows when compound interest is
applied.
 DISCOUNTING
The process of finding the present value of
a cash flow or a series of cash flows.
It is the reverse of compounding.