2

Time Value of Money

OBJECTIVES

To explain the concept of time value of money in general

To show how the future value of cash flows is computed

To show how the present value of future cash flows is computed

The concept of the maximization of corporate wealth necessarily involves the study of the time value of money. This is because the benefits that a firm expects to receive from an investment are usually spread out over a period of time. Such benefits need to be translated into their present value so as to facilitate their comparison with the initial investment and thereby to ascertain whether the investment has really added something to corporate wealth.

The concept of time value of money is also relevant to the shareholders, who make ...

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