Finance: Time value of money

Question 1

Time value of money:

Answer 1

Money in the present is worth more than the same amount of money in the future

Question 2

Present value:

Answer 2

The value of a sum of money today. Present value calculations move money backwards in time.

Question 3

Future value:

Answer 3

The value of a sum of money at a specific time in the future. Future value calculations move money forwards in time.

Question 4

Timeline:

Answer 4

A tool used for visualising a time value of money scenario. All the periods have to always be equal.

Inflows of cash are positive numbers

Outflows of cash are negative numbers

Question 5

Compounding:

Answer 5

the process used to move money forward in time to calculate the future value

Question 6

Discounting:

Answer 6

the process used to move money backward in time to calculate the present value

Question 7

Compounding Formula:

Answer 7

FVn = Co x ( 1 + r )^n

Future Value = Cash Flow x (Interest rate)^ years to FV

Question 8

Discounting Formula:

Answer 8

PV = Cn / ( 1 + r )^n

Present Value = Cash Flow / (Interest rate)^ years to PV

Question 9

Net present value:

Answer 9

Difference between benefits and costs of a particular investment.

A positive NPV is an indication that a firm should invest in a project.

Question 10

Present values of multiple cash flows formula:

Answer 10

PV = N∑0 Cn / ( 1 + r )^n

Question 11

Future values of multiple cash flows formula:

Answer 11

FVn = N∑0 Cn x ( 1 + r )^n