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The Time Value of Money
The Time Value of Money
The Timeline
Compounding is the process Discounting is the process The formula for compounding a
used to move money forward in used to move money backward cash flow over n years:
time: in time: FVn = C0 × (1 + r)n
Increases the value of a sum Decreases the value of a sum Formula for discounting a cash
flow over n years:
of money of money
Cn
Involves multiplication Involves division
PV = _____
(1 + r)n
Calculates future value Calculates present value
C : cash flow
n : time
r : return earned (in decimal
form)
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FINANCE: TIME VALUE OF MONEY SMARTLY
To compare or combine cash flows, they must be moved forward or Present and future values of
backward to the same point in time. multiple cash flows can be
calculated with the following
The following images demonstrate how to use present and future formulas:
values with multiple cash flows.
Present Value:
Future Value: