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The Time Value of Money Learning Module The Time Value of Money Would you prefer to have $1 million now or $1 million 10 years from now? What is The Time Value of Money? A dollar received today is worth more than a dollar received tomorrow This is because a dollar received today can be invested to earn interest The amount of interest earned depends on the rate of return that can be earned on the investment Time value of money quantifies the value of a dollar through time Uses of Time Value of Money Time Value of Money, or TVM, is a concept that is used in all aspects of finance including: Bond valuation Stock valuation Accept/reject decisions for project management Financial analysis of firms And many others! Formulas Common formulas that are used in TVM calculations:* Present value of a lump sum: PV = CFt / (1+r)t OR PV = FVt / (1+r)t Future value of a lump sum: FVt = CF0 * (1+r)t OR FVt = PV * (1+r)t Present value of a cash flow stream: n PV = S [CFt / (1+r)t] t=0 Formulas (continued) Future value of a cash flow stream: n FV = S [CFt * (1+r)n-t] t=0 Present value of an annuity: PVA = PMT * {[1-(1+r)-t]/r} Future value of an annuity: FVAt = PMT * {[(1+r)t –1]/r} Variables where r = rate of return t = time period n = number of time periods PMT = payment CF = Cash flow (the subscripts t and 0 mean at time t and at time zero, respectively) PV = present value (PVA = present value of an annuity) FV = future value (FVA = future value of an annuity) Types of TVM Calculations There are many types of TVM calculations The basic types will be covered in this review module and include: Present value of a lump sum Future value of a lump sum Present and future value of cash flow streams Present and future value of annuities Keep in mind that these forms can, should, and will be used in combination to solve more complex TVM problems Basic Rules The following are simple rules that you should always

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