LEARNING GOALS

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TIME VALUE

OF MONEY

CHAPTER

Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU

Accounting:You need to understand time-value-of-money
calculations in order to account for certain transactions
such as loan amortization, lease payments, and bond interest
rates.

Information systems:You need to understand time-value-of-
money calculations in order to design systems that optimize the
firm’s cash flows.

Management:You need to understand time-value-of-money
calculations so that you can plan cash collections and dis-

bursements in a way that will enable the firm to get the greatest

value from its money.

Marketing:You need to understand time value of money

because funding for new programs and products must be justi-

fied financially using time-value-of-money techniques.

Operations:You need to understand time value of money

because investments in new equipment, in inventory, and in

production quantities will be affected by time-value-of-money

techniques.

Calculate both the future value and the present

value of a mixed stream of cash flows.

Understand the effect that compounding interest

more frequently than annually has on future value

and on the effective annual rate of interest.

Describe the procedures involved in (1) determin-

ing deposits to accumulate a future sum, (2) loan

amortization, (3) finding interest or growth rates,

and (4) finding an unknown number of periods.

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Discuss the role of time value in finance, the use LG4

of computational tools, and the basic patterns of

cash flow.

Understand the concepts of future and present

value, their calculation for single amounts, and

the relationship of present value to future value.

Find the future value and the present value of both

an ordinary annuity and an annuity due, and find

the present value of a perpetuity.

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