A22 Eqns of Value

Question 1

what is the meaning of “time value of money”?

Answer 1

The value of an amount of money depends on
- the time elapsed since the money was paid in the past,
- time time that will elapse in the future until it is paid

In other words, a money amount only has meaning if it also attached to a point in time.

Question 2

what must be done first in order to compare/add/subtract two money amounts?

Answer 2

the values must first be accumulated/discounted to a common point in time.

Question 3

what is an eqn of value?

Answer 3

given cash inflows and outflows that are being exchanged, the eqn of value is the eqn relating the cashflows after they have been accumulated/discounted to a common comparision time

Question 4

How can the comparision date for two cashflows be chosen, if compound interest is being used?

Answer 4

Any comparison date can be chosen

Question 5

how do you set up a eqn of value?

Answer 5

draw timeline, set a time, then accumlate or discount to get to that point in time