FinanceLesson 1 of 3 in the course Time Value of Money I: Single Payment Value

Time Value of Money: Present Value, Future Value, and Lump Sums

5 flashcards · 5 quiz questions · 5 match pairs · 1 fill-in sentences · English

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Summary

Money available now can be invested and may earn interest, so it can have a different value from the same amount received later. This lesson introduces the time value of money, present value, future value, and lump sums—the basic building blocks for analyzing cash flows.

The time value of money (TVM) is based on the opportunity to earn interest on money invested or deposited in an interest-bearing account. If you invest cash today, the investment may generate interest over time. As a result, an amount invested now can grow into a larger amount in the future.

All flashcards

Time value of money
The idea that money's value depends partly on when it is available because it can be invested to earn interest.
Present value
The value of money now, including the current worth of a sum to be received later.
Future value
The value to which money grows by a specified future date after earning interest.
Factors affecting investment growth
Time invested and the interest rate earned; generally, a longer period and higher rate lead to more growth, all else equal.
Lump sum
A single cash receipt or payment occurring at one point in time.

Quiz questions

  1. What opportunity underlies the time value of money?Answer: Invested cash can earn interest over time.
  2. What does present value describe?Answer: The value of money now, including the current worth of a future sum.
  3. What is the future value of an investment?Answer: The value it reaches at a specified future time after earning interest.
  4. If the interest rate is unchanged, why can a longer investment period increase future value?Answer: Interest has more time to accrue.
  5. How can a complex cash-flow stream be analyzed using lump sums?Answer: Break it into individual cash flows and analyze each amount and its timing.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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