The basic idea behind the concept of time value of money is:

1
Ch. 9 - Time value of money

• The basic idea behind the concept of time value
  of money is
• 1 received today is worth more than 1 in the
  future
• OR
• 1 received in the future is worth less than 1
  today
• Why?
• because interest can be earned on the money
• The connecting piece or link between present
  (today) and future is the interest rate

2
Ch 9 - Present Value and Future Value

• Present Value
• The current value of a future sum. The value is
  discounted back at a given interest rate for a
  specific number of periods.
• Future Value
• The value that a current amount grows to at a
  given interest rate over a given time period.
  Future value is what money today will be worth at
  some point in the future
• FV PV(1 i)t
• PV FV/(1 i)t