The time value of money calculations can also be used to calculate the net present value of a series of cash flows, or of an investment plus a series of cash flows. Basically, the net present value calculation compares the value of a dollar today with the value of that dollar in the future, after taking rate of return and/or inflation into account. When evaluating an investment, it is desirable for the net present value to be greater than the amount invested; otherwise, there is no incentive to make that investment.
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A typical time value of money question will look something like this:
- If $10,000 is invested at 6%, compounded monthly, it would be worth $18,194 in 10 years. $18,194 would be the investment's _____________.
- Internal rate of return
- Present value
- Expected return
- Future value
Rates of Return
The correct answer is "d" - the ending value is known as the future value.