The Portable MBA in Finance and Accounting, 4th Edition

4

Discounted Cash Flow

James A. Elfter

Time Value of Money

Saving with a goal in mind has been a part of most people’s lives. Whether we are saving for a rainy day, saving to buy a stereo, a car, a house, a gift for someone special, or retirement, we set a goal and we strive to achieve the goal in a specific or fixed amount of time.

If I owe you a sum of money, would you rather receive it today or a year from today? The time value of money refers to what the value of a dollar amount is today (present value) versus what the value of that same dollar amount will be in X amount of time (future value). For example, what is the value of $10,000 today versus the value of $10,000 20 years ago, or 20 years in the future? Would $10,000 10 years ago have been enough money to buy a new car? Will $10,000 buy a car today? Will $10,000 buy you a car in 10 years?

Financial calculations for the time value of money can be done by algebra, by using compound interest tables, by using a financial calculator, or—most quickly and easily—by using Microsoft Excel®. Excel is the best number cruncher on this planet, and is used by financial professionals worldwide.

If you need some instruction in Excel—or a refresher—get started now. You will find links for Excel tutorials at the end of this chapter.

To see explanations and illustrations of using Excel for financial calculations involving the time value of money, check out the Web site for this chapter.

Further and more advanced uses of the time value ...