1. Time Value of Money – Part One (Ch. 2)
04/10/06

2. Basic intuition
Because of the ability of investors to earn interest on funds available today, the time value of money posits that a dollar today is worth more than a dollar tomorrow.

3. Future value
Future value – the value of a present or future, single cash flow or stream of cash flows at a specific future date.
Principal – amount deposited today
Interest rate – the rate at which your money is growing. This can also be considered to be a growth rate and can also represent an opportunity cost.
Compounding of interest (interest on interest) – interest earned on accumulated interest

4. Future value
The future value at time n of a single cash flow today compounded (or growing) at an interest rate r can be calculated as:
The term (1+r)n is also referred to as the Future Value Interest Factor (FVIF)

5. Methods of calculation
Equation
Financial calculator
Spreadsheet

6. Present value
Present value – the value of a future, single cash flow or stream of future cash flows today.
Discount rate – the interest rate that allows us to convert future cash flows into cash flows in present dollars.

7. Present value
The present value of a single cash flow at time n today discounted at an interest rate r can be calculated as:
The term 1/(1+r)n is also referred to as the Present Value Interest Factor (PVIF)

8. Four variables -- one equation
With a single future cash flow and a cash flow today, we can also solve for n: r:

9. Doubling your money: The rule of 72s
Before calculators and spreadsheets a quick estimate of the time needed to double your money was found by using the rule of 72s:
Time estimate = 72 / interest rate
The rule is also good to find the interest rate needed to double your money in a given period
Interest rate estimate = 72 / n