Appendix C: Time Value of Money

What are annuities?

Annuities are cash payments of equal amounts over time periods of equal length.

Future value of the invested amount formula

Initial investment (1 + interest rate) ^number of compounding periods

Compound interest

Interest you earn on the initial investment and on previous investment.

Simple interest

Interest you earn on the initial investment only.

What is the present value of an annuity?

It is the sum of the present values of a series of cash payments.

What does the concept of the time value of money mean?

The concept of the time value of money means that the value of money today is greater than the value of that same amount of money in the future.

What is the purpose of calculating the future value of an annuity?

The purpose of calculating the future vale of an annuity is determining the value of the payments at the end of the last payment.

When interest is compounded more than annually, we...

adjust the interest and number of compounding periods in the formula when calculating future value.

Present value formula

future value of the invested amount / ((1+interest rate)^number of compounding periods)

The future value of a single amount is...

how much an amount will grow to be in the future.

Payments do not have to be...

monthly. They could be quarterly, semiannually, or an interval.

Present value tells us...

the value today of receiving some larger amount in the future.