This lesson examines the time value of money, a fundamental concept that underpins all financial valuation and decision-making.

2.1 The Core Principle

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 . This reflects the opportunity cost of capital—the return foregone by not investing elsewhere.

2.2 Key Calculations

• Future Value and Compounding: The value of a present sum at a future date, calculated by applying compound interest .

• Present Value and Discounting: The current worth of a future sum, determined by discounting at an appropriate rate .

• Annuities and Perpetuities: Series of equal cash flows occurring at regular intervals. These are a core component of bond valuation and capital budgeting.