1. Time value of money
Money that the firm has today is more
valuable than money in future because
the money it now has can be invested
and earn positive return

2. Future value
• The value at a given future date of a present
amount placed on deposit today and earning
interest at a specified rate. Found by applying
compound interest over a specified period of
time

3. Future value(cont…)
• Compound interest
interest that is earned on a given deposit and has
become part of the principle at the end of a
specified period
• Principle
The amount of money on which interest is paid
• Future value interest factor: the multiplier used
to calculate, at a specified interest rate, the
future value of a present amount as of a given
time

4. Present value
• The current value of a future amount
• Discounting cash flow: the process of finding
present values; the inverse of compounding
interest
• Present value interest factor: the multiplier
used to calculate, at a specified discount rate,
the present value of an amount to be received
in a future date

5. • Annuity: a stream of equal periodic cash flows
• Ordinary annuity: cash flow occurs at the end
of each period
• Annuity due: cash flow occurs at the
beginning of each period
• Mixed stream: a stream of unequal periodic
cash flows that reflect no particular pattern
• Perpetuity: an annuity with an infinite life,
providing continual cash flow

6. Compounding of interest
• Semiannual compounding
• Quarterly compounding
• Continuous compounding

7. Nominal and effective annual rates of
interest
• Nominal (stated) annual rate
• Effective (true) annual rate