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    The Time Value of Money

    68 Pages | 15,401 Words

    This eBook is a complete guide to computations involving the time value of money. This book will discuss and illustrate the concept of the time value of money. It will discuss the discount rate and how to compute the weighted-average cost of capital for an investment or project. Furthermore, it would discuss and illustrate how to compute the present and future values of a lump-sum and an annuity using formulas and Microsoft Excel. It will then illustrate how to apply this knowledge to derive the net present value, internal rate of return, and modified internal rate of return of a project, as well as how to value bonds and notes.

    This book is ideal for university students in beginning accounting and finance classes as well as practicing accountants and financial analysts. Though it does not go into as much detail as university textbooks do, it will serve as a valuable adjunct to those books by summarizing the main concepts and providing the student with a framework in which to read the textbooks.

    An Introduction to The Time Value of Money

    Buying a car can be a real hassle. First you try to figure out the make and model of car you want. Then, you determine whether you want a new or used car. Finally, you come to the truly scary part: Will you pay cash or finance your purchase? If you get a loan, you may pay more in interest expense than the cost of the car. If you pay cash, how much interest income will you lose on the cash you pay?

    In a capitalist society, a person who risks his or her resources is entitled to a reward (also called a return ) on the resources they risk. Interest is the cost (or return) on the use of money. If money were free (i.e., there was no such thing as interest), $1 deposited in a bank today would be $1 a year from and $1 ten years from now. Because interest is an integral part of our society, this is not true; we would expect that $1 deposited in the bank today will be worth more than $1 a year from now and even more ten years from now. This is the nature of the time value of money.

    The time value of money is used everywhere in modern society. When an investor decides between competing investments (including bank accounts), the owner of a small business decides whether to lease or buy a new computer, or a student decides which car loan to accept, they are applying time value of money concepts.

    Unfortunately, most textbooks treat finance as something closer to rocket science than to a common practice performed by millions of businesspeople every year. I am writing this book to demystify this aspect of finance and to teach you, the student, its most basic principles and practices.