CHAPTER 8

The Time Value of Money

Discounting and Net Present Values1

This chapter deals with compounding and discounting. For students of accounting, it is a critical component in understanding long-term liabilities. After the basics are presented, the chapter will discuss how to value annuities (equal periodic payments), bonds (debt obligations), and perpetuities (payments that continue forever).

The Time Value of Money

The time value of money is one of the most powerful concepts in finance. It is a concept that small children express when they say, “I want it now, not later, now!” Quite simply, the idea is that a dollar today (or anything, for that matter) is worth more than a dollar tomorrow.

An easy way to start the explanation of the time ...

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