The Time Value of Money

Calculating the Real Value of Your Investment

Key Topics Covered in This Chapter

  • Present and future value
  • Net present value
  • Internal rate of return
  • Hurdle rate, discount rate, and the cost of capital
  • Economic value added

IN CHAPTER 8, WE EXAMINED return on investment (ROI) and payback period analysis—two tools that managers use to make decisions and assess performance. We noted, however, that these have one important weakness: They fail to account for the time value of money. That is, though they indicate (or estimate) inflows and outflows of cash, ROI and payback analysis fail to recognize when those cash flows take place. As we’ll explain here, the timing of those cash flows matters, and should be factored into management ...

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