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August 1, 2018 Leave a comment

Smartly Institute

via Platform


Online Educational Course “Finance: Time Value of Money”


Present Value and Future Value

Time value of money: Money in the present is worth more than the same amount of money in the future.
Present value: The value of a sum of money today. Present value calculations move money backwards in time.
Future value: The value of a sum of money at a specific time in the future. Future value calculations move money forwards in time.

The Timeline

Timeline: A tool used for visualizing a time value of money scenario. The periods of a timeline must always be equal.
Inflows of cash are positive numbers and outflows of cash are negative numbers.

Compounding and Discounting

Compounding is the process used to move money forward in time:
Increases the value of a sum of money
Involves multiplication
Calculates future value

Discounting is the process used to move money backward in time:
Decreases the value of a sum of money
Involves division
Calculates present value

Net Present Value

Net present value (NPV): The difference between the present value of all benefits and present value of all costs of a particular investment.
Benefits are represented by cash inflows (positive).
Costs are represented by cash outflows (negative).
Net present value is represented by this equation:

NPV = PV(benefits) – PV(costs)

A positive NPV (inflows > outflows) is an indication that a firm should invest in a project.

Moving Money Over Time

To compare or combine cash flows, they must be moved forward or backward to the same point in time.