Class, the TVM (time value of money) in finance is a central concept in this course and the finance world. It is a new concept for many of you, so let me take some time to explain: A dollar today is worth more than a dollar in the future. Why? The dollar today can be invested and will earn interest. Example: I can give you $100 now or $100 in 3 years. Assume an interest rate of 5%. How much will the $100 I give you now grow to in 3 years? Use the factor for the future value of a single sum: Periods = 3, Percent = 5 $100 x 1.158 = $115.80 So, if you invested the $100 at 5%, at the end of 3 years you would have $115.80 If I gave you the $100 in 3 years, you would only have $100 since you lost the chance to invest the funds. That is why the $100 in three years is worth less than $100 now. What is the $100 that I will give you in 3 years worth today? Use the factor for the present value of a single sum: Periods = 3, Percent = 5 $100 x .864 = $86.40 So, the $100 that you will get in 3 years is worth only $86.40 today. What if you invested the $86.40 today for 3 years at 5% - you should end up with $100 at the end of three years. Let's see if this works: Use the future value of a single sum factor: $86.40 x 1.158 = $100.05 (the five cents is due to rounding the present value and future value factors) So, at 5% interest: ? $100 now is worth $100 ? $100 in 3 years is worth $86.40 now ? The difference is the time value of money ? $100 invested for 3 years at 5% grows to $115.80 ? $86.40 invested for 3 years at 5% grows to $100 Does this help get us going on the mechanics and concept of the TVM? What questions do you have?