6-1

TIME VALUE OF MONEY

One of the most fundamental principles

of Financial Decision Making is the time
value of money. This concept helps the
manager to choose the best alternative
between two or more proposals. He
should prefer the cash flow that occurs
earlier in time because the time value of
money makes this alternative more
valuable.
 6-2

Future Value of a Single Amount

Number
Number
FV = PV (1 + i) n of
of
Compounding
Compounding
Periods
Periods
Future
Future Present
Present Interest
Interest
Value
Value Value
Value Rate
Rate
 6-3

Present Value of a Single Amount

Remember our equation?

n
FV = PV (1 + i)

We can solve for PV and get . . . .

FV
PV = n
(1 + i)
 6-4

Basic Annuities

An annuity is the sequence of

uninterrupted, equal cash
flows, when the cash flows are
identical and the time between
each cash flow is identical.
 6-5

Ordinary Annuity

An ordinary annuity is the sequence of uninterrupted,

equal cash flows with payments (receipts)
occurring at the end of each period.

End End
 6-6

Annuity Due

An annuity due is the sequence of uninterrupted, equal

cash flows with payments (receipts) occurring at the
beginning of each period.

Beginning Beginning Beginning

 6-7

PERPETUITY

Perpetuity is a series of
equal periodic payments
that continues forever (to
infinity).