Time Value of Money

• Comparing/compounding values: It is only possible to compare or combine values at the same point in time
• Compounding: To calculate a cash flow’s future value, it must be compounded
• Discounting: To calculate the value of a future cash flow, we must discount it

Future value of a cash flow:

$$F{V}_n=C\times (1+r{)}^n$$

where $FV$ is the future value, $C$ is cash flow, $r$ is the interest rate, and $n$ is the number of periods.

Present value of a cash flow:

$$PV=\frac{C}{(1+r{)}^n}$$

where $PV$ is present value and $C$ is a cash flow that comes $n$ periods from now.