IB Technicals - Finance 101 and Corporate Finance Fundamentals

What is the time value of money?

The time value of money is the core financial principle that money today is worth more than tomorrow, because money that is available now can be invested to earn a return.

What is present value, and how do you calculate it?

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. It is calculated as future value divided by (1 + discount rate) raised to the number of periods between (usually years).

What is future value, and how do you calculate it?

Future value is how much a current asset or investment will be worth in the future, assuming a stated rate of return. It is calculated as the present value times (1 + discount rate) raised to the number of periods in between (usually years).

What is net present value, and why do companies use it?

Net present value is the current value of a future sum of money or stream of cash flows minus the initial investment (i.e., present value minus initial investment). It is useful for companies to determine whether an investment or project will be profitable, as comparing projects against each other to determine which initiative to take on.