Unit Overview
The time value of money (TVM) is one of the most important ideas in finance: a dollar today is worth more than a dollar tomorrow because today’s dollar can earn interest.
This unit teaches the math and intuition behind present value, future value, compounding, and annuities. You will also learn discounted cash flow (DCF) analysis—one of the most widely used tools for valuing projects and investments.
Learning Objectives
- Explain why money has different value across time and why interest rates matter.
- Calculate future value (FV) using simple and compound interest.
- Calculate present value (PV) to compare cash flows received at different times.
- Solve annuity and perpetuity problems and interpret what they represent.
- Apply discounted cash flow (DCF) logic to estimate the value of a stream of payments.
Lessons in This Unit
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Lesson 2.1: Why Time Changes Value
TVM intuition: inflation, risk, opportunity cost, and the role of interest rates.
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Lesson 2.2: Future Value (FV) & Compounding
How savings grow: compounding frequency, effective rates, and growth over time.
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Lesson 2.3: Present Value (PV) & Discounting
Bringing future money back to today: discount rates, timelines, and PV calculations.
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Lesson 2.4: Annuities
Valuing steady payment streams—loans, savings plans, and retirement contributions.
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Lesson 2.5: Perpetuities
Valuing payments that continue indefinitely and why the discount rate is everything.
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Lesson 2.6: Discounted Cash Flow (DCF)
Using PV logic to estimate what a stream of cash flows is worth today.
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Lesson 2.7: TVM in the Real World
Common applications: mortgages, bonds, retirement planning, and investment decision-making.
Unit Assessment
After completing all lessons, students should:
- Complete the Unit 2 Quiz
- Solve a short set of PV/FV problems using a calculator or spreadsheet
- Build a simple discounted cash flow (DCF) model for a hypothetical project
Self-Paced Learning Guidance
This unit is designed to be hands-on. Use a financial calculator or spreadsheet as you go. Work slowly through timelines, write down your assumptions, and check your answers with a second method whenever possible.