Week 5,6 : The Time Value of Money

After studying Chapter 3, you should be able to:

 Understand what is meant by “the time value of money.”

 Understand the relationship between present and future value.

Describe how the interest rate can be used to adjust the value of cash flows – both forward and backward – to a single point in time.

Calculate both the future and present value of: (a) an amount invested today; (b) a stream of equal cash flows (an annuity); and (c) a stream of mixed cash flows.

 Distinguish between an “ordinary annuity” and an “annuity due.”

Use interest factor tables and understand how they provide a shortcut to calculating present and future values.

Use interest factor tables to find an unknown interest rate or growth rate when the number of time periods and future and present values are known.

Build an “amortization schedule” for an installment-style loan.

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