5
The Time Value of Money
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Learning Objectives
Explain what the time value of money is and why it is so important in the field of finance.
Explain the concept of future value, including the meaning of the terms principal, simple interest, and compound interest, and use the future value formula to make business decisions.
Explain the concept of present value, how it relates to future value, and use the present value formula to make business decisions.
Discuss why the concept of compounding is not restricted to money, and use the future value formula to calculate growth rates.
When you purchase an automobile from a dealer, the decision of whether to pay cash or finance your purchase can affect the price you pay. For example, automobile manufacturers often offer customers a choice between a cash rebate and low-cost financing. Both alternatives affect the cost of purchasing an automobile; but one alternative can be worth more than the other.
To see why, consider ...
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