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Understanding the Time Value of Money: Essential Concepts and Examples

Discover why the Time Value of Money (TVM) is crucial in financial decision-making. Learn about variables like PV, FV, and I, and explore basic formulas, annuities, uneven cash flows, and amortization. Gain insights into interest rates, signs in calculations, and more.

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Understanding the Time Value of Money: Essential Concepts and Examples

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Presentation Transcript

  1. Time Value of Money

  2. Why do we need TVM? • $ now does not equal $ later • Why? • Inflation • Purchasing power

  3. Key Variables in TVM • PV • FV • I • PMT • N

  4. Basic Examples • What is the basic formula for PV? • Example #1 • Example #2

  5. Annuities • What is an annuity? • How do we solve for an annuity?

  6. Uneven Cash Flow Stream • How do you find the PV of a stream of cash flows that are not equal (i.e. each CF is different)?

  7. Amortization • Building an amortization table is a four step process • Step 1 • Step 2 • Step 3 • Step 4 • Repeat steps 2-4 for each row on the table

  8. Things to Remember • Interest rates are always assumed to be quoted…? • Signs in the calculator • Time frequency of I, PMT, N

  9. Additional Topics • ? • ? • ?

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