Saylor URL: http://www.saylor.org/books Saylor.org
nominal or face values in the future because that distance over time, that separation
from liquidity, costs us by discounting those values.
KEY TAKEAWAYS- Liquidity has value because it enables choice.
- Time creates distance or delay from liquidity.
- Distance or delay creates risk and opportunity costs.
- Time affects value by creating distance, risk, and opportunity costs.
- Time discounts value.
EXERCISES- How does the expression “a bird in the hand is worth two in the bush” relate to the concept of the
time value of money?- In what four ways can “delay to liquidity” affect the value of your wealth?
4.2 Calculating the Relationship of Time and Value
LEARNING OBJECTIVES
- Identify the factors you need to know to relate a present value to a future value.
- Write the algebraic expression for the relationship between present and future value.
- Discuss the use of the algebraic expression in evaluating the relationship between present and
future values.- Explain the importance of understanding the relationships among the factors that affect future
value.Financial calculation is not often a necessary skill since it is easier to use calculators,
spreadsheets, and software. However, understanding the calculations is important in
understanding the relationships between time, risk, opportunity cost, and value.
To do the math, you need to know
- what the future cash flows (CF) will be,
- when the future cash flows will be,
- the rate at which time affects value (e.g., the costs per time period, or the
magnitude [the size or amount] of the effect of time on value).