This set of interactive sessions will introduce you to the concepts and applications of the time value of money. Each session includes examples of an application as well as a spreadsheet exercise for hands-on practice. Microsoft Excel is used to perform and illustrate computations with standard formulas. If you are unfamiliar with Excel or just need a review of the basics, a short tutorial is provided here. Many more tutorials are available on the web. For those who have had no experience using Excel they may want to walk through a more complete tutorial. Links to useful websites and previously-constructed Excel spreadsheets are provided with each session.

Some new terms:

Discounting: a method to convert payments received in the future into an equivalent payment today.  

Compounding: a method to convert payments received today into an equivalent payment received in the future.  

Session 1 illustrates the concepts of present value and future value of a single lump sum of money, for one or multiple years. The examples used are the future value of a $100 lump sum deposit today and the present value of a lump sum of $5,000 received three years in the future.

Session 2 introduces the power of compounding interest on a less than annual basis. Such frequent compounding affects the true or effective rate of interest. The example used in this module shows that savings with quarterly compounding accumulates more interest than an account with annual compounding. Computation of the effective interest rate is also included.

Session 3 discusses the present value and future value concepts for annuities, which are constant streams of payments or deposits at equally spaced intervals (e.g. monthly). The three examples used illustrate computation of monthly payments on a loan, the present value of a lottery payout, and the ending annuity balance on a stream of deposits.

Session 4 introduces the perpetuity concept, where a stream of payments lasts forever. This concept is often used to determine the amount of money needed to provide an annual payment that could extend indefinitely. This session's example shows how to compute the initial investment required for a benefactor to create a trust providing an annual gift of $500. A second example is the determination of the value of a share of preferred stock, where the stock's dividends are considered a perpetuity.

Session 5 extends the annuity concept by considering uneven streams of payments. The example used is the present value of a firm's expected future profits from two potential new projects.