Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionIII. Valuation of Future
Cash Flows- Introduction to
Valuation: The Time Value
of Money
(^180) © The McGraw−Hill
Companies, 2002
example finishes our introduction to basic time value concepts. Table 5.4 summarizes
present and future value calculations for future reference. As our nearby Work the Web
box shows, online calculators are widely available to handle these calculations, but it is
still important to know what is really going on.
CONCEPT QUESTIONS
5.3a What is the basic present value equation?
5.3bWhat is the Rule of 72?
CHAPTER 5 Introduction to Valuation: The Time Value of Money 149
How important is the time value of money?A recent search on
one web engine returned over 31,000 hits! It is important to understand
the calculations behind the time value of money, but the advent of financial
calculators and spreadsheets has eliminated the need for tedious calculations.
If fact, many web sites offer time value of money calculators. The following is one ex-
ample from Cigna’s web site, http://www.cigna.com. You have $10,000 today and will invest
it at 10.5 percent for 30 years. How much will it be worth at that time? With the Cigna
calculator, you simply enter the values and hit Calculate:
The results look like this:
Who said time value of money calculations are hard?
Work the Web