This lesson explores the time value of money and its application in valuation.

3.1 Time Value of Money
The time value of money is the principle that a sum of money today is worth more than the same sum in the future due to its potential earning capacity, fundamental for valuation, investment analysis, and financial planning . Key concepts include:

  • Future Value and Compound Interest: Calculating the future worth of an investment .

  • Present Values: Determining the current worth of future cash flows .

  • Multiple Cash Flows: Handling cash flows occurring at multiple periods .

  • Level Cash Flows: Perpetuities and annuities .

3.2 Net Present Value (NPV)
NPV is the difference between the present value of cash inflows and outflows. A positive NPV indicates value creation and is the most reliable criterion for long-term investment decisions .

3.3 Other Investment Criteria
Other investment criteria include the Internal Rate of Return (IRR) and Payback Period, which are used as supplementary or initial screening tools but may have limitations compared to NPV .

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