Chapter 4 (and 5)
Exam 1, passing this course, the TVOM, a dollar today and a dollar tomorrow....
If you pass this course, you don’t have to take it again...
Understanding the TVOM (time value of money) is key to passing this course...
And a dollar today (in a rational non-deflationary world) is worth more than a dollar tomorrow.
In a practical sense, we all know that a dollar today is worth more than a dollar tomorrow; at a minimum, we could earn
interest on a dollar today and it would be worth more than a dollar tomorrow. But, there is much more to the study of
the TVOM than that. As financial managers and pursuing either the maximization of the firm’s stock price or our own
material well-being, we need a set of tools to plan for different sets of cash inflows (income, gifts, inheritance, future
property or various asset sales, bonuses, retirement proceeds, etc.) and outflows (retirement and education funding,
home and auto purchases, durable housing goods purchases, children’s expenses, parent’s expenses, etc.). We need a
manner with which we can compare the impact of each of these flows to one-another; we need a way to contrast the
impacts of differing cash flows occurring years apart. It is with the analysis of the TVOM and its adjacent tools of
future and present value analysis that we can begin this comparison and start to examine these contrasts.
First, the future value (FV) of money.
Key terms include the future value (FV) of money, simple interest, compound interest, compounding periods,
single and multi-period calculations, and the summary of TVOM calculations in Table 4.4 on page 106.
These are the tasks you need to be able to perform:
1. Breakdown of the FV function.
2. Retirement (education, home down payment, big tickets, etc.) planning/future values.
3. Number of years to a goal.
4. Interest required to fulfill a plan.
5. Future value of uneven set of cash flows.
6. The impact of compounding.
7. A million dollars tomorrow or a lot less today?.....
Second, the present value (PV) of money.
Key terms include the TVOM functions on page 106, discounting periods, single and multi-period calculations,
the inverse relationship between interest rates and present values and saving for retirement/homes/cars/etc. Be
familiar with the following present value (PV) tasks.
1. Present value of a lump sum.
2. Present value with different interest rates.
3. Present value of an uneven set of cash flows.
4. Examples from your homework?
Third, as a hint of things to come in chapter 5, begin to review present and future values of even and uneven
sets of cash flows. Consider such topics as: (in chapter 5) those highlighted on page 129 in Table 5.2. The
multiple cash flow stuff in chapter 5 is typically more of a challenge than the single cash flow stuff in chapter
4.:
Braced on the tasks above, you are in good shape for the first topics in the TVOM and should be well on the
way to developing a long and intimate relationship with your BA-II Plus...life is good, isn’t it?
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