Time Value of Money (TVM)
Key Concept: Time Value of Money (TVM)
One of the foundational concepts in corporate finance—and a central theme in FINA 575—is the Time Value of Money. This principle states that a dollar today is worth more than a dollar in the future due to its potential earning capacity. It forms the basis for nearly every major decision in finance, including investment appraisal, loan amortization, and valuation of cash flows.
Understanding TVM is essential for applying tools like Net Present Value (NPV) and Internal Rate of Return (IRR), which help firms decide whether to proceed with capital projects or financial investments.
Online Supplement:
Khan Academy – Time Value of Money Series
This free video series explains core TVM concepts like present and future value, annuities, and perpetuities in a visual and approachable format—perfect for reinforcing your textbook learning.
Real-World Application:
"Why Interest Rates Matter: A CEO’s Guide to Discounting Future Cash Flows" – Harvard Business Review
This article explains how managers and investors use TVM to make real-world decisions about capital allocation and firm valuation.
Use these resources to deepen your understanding of TVM—it’s not just a formula, it’s a mindset that drives modern financial decision-making.