Review of The Subject of Time Value of Money

The concept of the time value of money is very important in today’s business world. No doubt you have studied this concept previously in basic accounting, finance, and business math classes. This course is intended as a review of the subject and includes illustrations of common applications.

Decision makers, whether business executives or parents saving for their children’s college education, must try to adjust for the impact of interest and changing economic prices. Consider the following illustrative situations:

• You are in the market for a used car. A newspaper advertisement offers the vehicle you want with two payment options. You can choose between an immediate cash price of $22,500 or a 6% financing option with payments over five years of $395 at the end of each month. Which alternative purchase plan should you choose?

• You intend to provide income for your retirement. If you are 20 years old, how much must you invest now in order to establish a fund large enough to pay for your retirement in 45 years?

• Every month, millions of individuals make mortgage payments on their homes. Because part of each payment is interest, and therefore tax-deductible, a method is needed for calculating the interest portion of each payment. What are the procedures for determining the interest and principal portions of each payment over the life of the mortgage?

In each of the preceding situations, decisions must be made regarding inflows and outflows of money over an extended period of time. Making correct financial decisions requires that the time value of money be taken into account. This means that dollars to be received or paid in the future must be “discounted” or adjusted to their present value. Alternatively, current dollars may be “accumulated” or adjusted to their future value so that comparisons of dollar amounts at different time periods can be meaningful.

Because future and present value techniques are commonly used in business and have become increasingly important, this course explains these techniques and provides several illustrations of their use.