Time Value of Money Flashcards
1
Q
What is time value of money
A
- Value of a dollar today is not the same as the value of a dollar 1-year from now
- Buy different things (inflation)
- Buy things at different times (consumer preference)
2
Q
what does TVM describe the relationship of
A
TVM describes the relationship between the value of a current dollar and the value of a future dollar
2
Q
what is the current value of an asset
A
the asset’s future cash flows discounted to today
3
Q
what is the formula for future value
A
fv = pv * (1 + r)^n
4
Q
what is the formula for present value
A
pv = fv / (1 + r)^n
5
Q
what time is pv
A
when time = 0
6
Q
in terms of a timeline, what does 1 year from today mean
A
time = 1
7
Q
what does time = 1 also mean
A
- end of the 1st year
- beginning of the second year
8
Q
what is pv
A
- a VALUE
= PV is not a cash amount - ex. $95 PV is not $95 of cash – it is the VALUE of $100 cash received 1-year from now
9
Q
are negative cash flows possible
A
- yes
- means its a loss
