Time value of money
All financial decisions must take into account the basic idea that money has time value.
In a financial transaction each payment should have a date, the date that it falls due.
Dated values are considered to be equivalent when they have the same value on the same date.
Dated values can be summed up only provided they are all due on the same date. To sum up values due on different dates, all values must be replaced by equivalent values dated on the same day (the comparison day).
Examples
| • | At 12 % simple interest $100 due in one year are equivalent to $112 due in two years. In the same way the $100 due in one year are equivalent to $89.29 due now.
|
|||||||||||||||||||||||||||||||||
| • | At
12 % compounded annually a series of three $100 payments every year starting
now has a value of:
|
|||||||||||||||||||||||||||||||||
| • | A more elaborated example can be found in the Lease payments vs. loan payments topic. |
Related topics
| Present value |
| Future value |
| Simple interest |
| Compound interest |
| Lease payments vs. loan payments |