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4. Defining the Time Value of Money Importance of the Time Value of Money Introduction to the Time Value of Money The Time Value of Money > Introduction to the Time Value of Money Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_54&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. Being given $100 today is better than being given $100 in the future because you don't have to wait for your money. Money today has a value (present value, or PV) and money in the future has a value (future value, or FV). The amount that the value of the money changes after one year is called the interest rate (i). For example, if money today is worth 10% more in one year, the interest rate is 10%. Defining the Time Value of Money Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/introduction-to-the-time-value-of-money- 54/defining-the-time-value-of-money-254- 4990?campaign_content=book_192_section_54&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Simple Interest Formula View on Boundless.com The Time Value of Money > Introduction to the Time Value of Money

6. Money today is worth more than the same quantity of money in the future. You can invest a dollar today and receive a return on your investment. Loans, investments, and any other deal must be compared at a single point in time to determine if it's a good deal or not. The process of determining how much a future cash flow is worth today is called discounting. It is done for most major business transactions during investing decisions in capital budgeting. Importance of the Time Value of Money Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/introduction-to-the-time-value-of-money- 54/importance-of-the-time-value-of-money-255- 8367?campaign_content=book_192_section_54&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Compound Interest View on Boundless.com The Time Value of Money > Introduction to the Time Value of Money

7. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

8. Key terms discounting The process of determining how much money paid/received in the future is worth today. You discount future values of cash back to the present using the discount rate. Future Value (FV) The value of the money in the future. interest rate The percentage of an amount of money charged for its use per some period of time. It can also be thought of as the cost of not having money for one period, or the amount paid on an investment per year. Interest Rate (i or r) The cost of not having money for one period, or the amount paid on an investment per year. Present Value (PV) The value of the money today. Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money

9. Simple Interest Formula Simple interest is when interest is only paid on the amount you originally invested (the principal). You don't earn interest on interest you previously earned. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Future value." GNU FDL http://en.wikipedia.org/wiki/Future_value View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Future_valueView on Boundless.com The Time Value of Money

10. Compound Interest In this formula, your deposit ($100) is PV, i is the interest rate (5% for Bank 1, 6% for Bank 2), t is time (5 years), and FV is the future value. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Future value." GNU FDL http://en.wikipedia.org/wiki/Future_value View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Future_valueView on Boundless.com The Time Value of Money

11. Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money Which of these is a variable used to calculate the time value of money? A) All of these answers. B) The interest rate. C) The amount of time that has passed. D) The present value of the sum you have.

12. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Time Value of Money Which of these is a variable used to calculate the time value of money? A) All of these answers. B) The interest rate. C) The amount of time that has passed. D) The present value of the sum you have.

13. Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money Which of the following is an explanation for why the concept of the time value of money is important to a business? A) All of these answers. B) The present value of a dollar you get in a year is less than the value of a dollar you get today. C) By figuring out the present value of future income, a company can better compare possible projects. D) A project's future unadjusted revenues can be misleading when trying to determine its profitability.

14. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Time Value of Money Which of the following is an explanation for why the concept of the time value of money is important to a business? A) All of these answers. B) The present value of a dollar you get in a year is less than the value of a dollar you get today. C) By figuring out the present value of future income, a company can better compare possible projects. D) A project's future unadjusted revenues can be misleading when trying to determine its profitability.

15. Attribution Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/Introduction." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/IntroductionCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/Introduction Wikipedia. "Time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Time_value_of_moneyCC BY-SA 3.0http://en.wikipedia.org/wiki/Time_value_of_money Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/interest-rate-i-or-rCC BY-SA 3.0http://www.boundless.com//finance/definition/interest-rate-i-or-r Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/future-value-fvCC BY-SA 3.0http://www.boundless.com//finance/definition/future-value-fv Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/present-value-pvCC BY-SA 3.0http://www.boundless.com//finance/definition/present-value-pv Wikipedia. "Time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Time_value_of_moneyCC BY-SA 3.0http://en.wikipedia.org/wiki/Time_value_of_money Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/discounting--2CC BY-SA 3.0http://www.boundless.com//finance/definition/discounting--2 Wiktionary. "interest rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/interest+rateCC BY-SA 3.0http://en.wiktionary.org/wiki/interest+rate Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money