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.



Exam Tips and Tricks
A typical time value of money question will look something like this:

  1. 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 _____________.
    1. Internal rate of return
    2. Present value
    3. Expected return
    4. Future value

The correct answer is "d" - the ending value is known as the future value.



Rates of Return

Related Articles
  1. Investing

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  2. Investing

    Calculating the Present Value of an Annuity

    The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate.
  3. Investing

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  4. Investing

    Calculating Present Value Interest Factor

    The present value interest factor is a number that makes it easier to calculate the present value of a payment or value to be received in the future.
  5. Investing

    Does Active Value Investing Pay Off?

    Learn about a recently published paper that explores why active value investors underperform.
  6. Investing

    How Much Is Your Investment Worth? A Look At TVM

    Investors are always searching for ways to calculate what an investment is worth. What will the money we invest today be worth in 5, 10, or even 50 years?
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center