Corporate Finance For Dummies, 2nd Edition

Chapter 9

Determining Present and Future Values: Time Is Money

IN THIS CHAPTER

Understanding what influences the value of money

Determining present value

Estimating future value

Money has a tendency to change its value over time. It usually becomes worth less as you hold onto it for longer periods of time. The two primary causes for this decrease in value are increasing prices (called inflation) and the cost of borrowing (called interest rates). A number of variables influence both inflation rates and interest rates, indirectly affecting the changes in value over time, but for the purposes of basic corporate finance, these two forces are the direct causes, so they’re the ones you want to pay attention to the most.

Both inflation and interest rates, in their ability to change the value of money over time, play a very important role in how corporations manage their liquid assets and their investments. Therefore, to have even a basic understanding of corporate finance, you must understand what the time value of money is and how it influences corporations. This chapter is here to help! In it, I describe how and why money loses value over time, how this change in value impacts corporations, ...