Appendix B: The time value of money - Future amounts and present values. In this chapter, the learning objectives are: Explain what is meant by the phrase time value of money, describe the relationships between present values and future amounts, explain three basic ways in which decision makers apply the time value of money,. | The Time Value of Money Future Amounts and Present Values Appendix B Appendix B: The Time Value of Money - Future Amounts and Present Values The Concept An amount of money available today can be safely invested to accumulate to a larger amount in the future. One of the most basic—and important—concepts of investing is the time value of money. This concept is based on the idea that an amount of money available today can be safely invested to accumulate to a larger amount in the future. As a result, an amount of money available today is considered to be equivalent in value to a larger sum available at a future date. Relationships between Present Values and Future Amounts In this example, your initial investment of $500 is the present value. It is invested for four years at 8% interest. Over the four years, the value of your investment increases to $680, the future amount. 0 1 2 3 4 $500 × $540 × $583 × $630 × In this example, your initial investment of $500 is the present value. It is invested for four years at 8% interest. Over the next four years, the value of your investment increases to $680, the future amount. The present value is always less than its future amount. This is the basic idea underlying the time value of money. But this idea often is expressed in different ways, including the following: A present value is always less than a future amount. A future amount is always greater than a present value. A dollar available today is always worth more than a dollar that does not become available until a future date. A dollar available at a future date is always worth less than a dollar that is available today. Applications of the Time Value of Money Concept Determine the amount to which an investment will accumulate over time Determine the amount that must be invested every period to accumulate a required future amount Determine the present value of cash flows expected to occur in the future Investors, accountants, and other . | The Time Value of Money Future Amounts and Present Values Appendix B Appendix B: The Time Value of Money - Future Amounts and Present Values The Concept An amount of money available today can be safely invested to accumulate to a larger amount in the future. One of the most basic—and important—concepts of investing is the time value of money. This concept is based on the idea that an amount of money available today can be safely invested to accumulate to a larger amount in the future. As a result, an amount of money available today is considered to be equivalent in value to a larger sum available at a future date. Relationships between Present Values and Future Amounts In this example, your initial investment of $500 is the present value. It is invested for four years at 8% interest. Over the four years, the value of your investment increases to $680, the future amount. 0 1 2 3 4 $500 × $540 × $583 × $630 × In this example, your initial investment of $500 .
