The Basics of Time Value of Money

This chapter introduces and discusses the time value of money. This is a fundamental concept in corporate finance and valuation. The chapter explains how time affects money's value and the discount rate's determinants. The concepts of present and future values of an amount are explained and elaborated. This is followed by a discussion of compounding interest and how this affects the present and future values of a lump sum amount. We use examples to illustrate the impact of annual, monthly, daily, and continuous compounding on lump sum amounts’ present and future values.