Time Value of Money

Time value of money is similar to opportunity cost. I have some money that i can invest in some project, but what is my next best opportunity. If i can see the difference, then okay but if not then search for another opportunity given the resources that you have.

Value is relative, compare with next best investment, if it does then it generates value for you.
Every instrument can be thought of as a series of cash flows. The diagram that we draw is called the time line. Divide future in periods. Give them a time subscript. you make an investment at time=0 to buy something and after that you hope to operate this or get some positive returns from the business. Forever perhaps or for a limited time period. The ideas is to figure out when cash flows occur. Using this diagram is extremely simple. Do use the time line even if the problem looks trivial. Donot hesitate to use the time line in order to note the time value of money.

We talk about two values, present value and future value.what would my cash flows be worth, if i kept investing these cash flows in the next best opportunity. Cash flows earn interest on interest as cash flows are invested year after year or period after period.

How much of the next-best investment would i buy to get these cash flows

PV and FV are additive in nature, that i can break up.

For loans
PV of payments = principal that you borrow
At any time at balance = FV of principal - FV of payments made

Interest Rates
APR (Annual Percentage Return ) is Bull shit. It is less than informative.
We need information on the following things
Time period covered by the Rate
Compounding Frequency
Rate

THree ways to quote rates or return of rates
Periodic Rate, Rp. The r that we use in FV and PV is a periodic rate. so first figure out what the periodic rate is.

Second way) Stated annual rate RA.
THird way )Very Handy tool as it is very informative = 1 year periodic rate =simple annual rate =annual rate compounded 1 per year.

(1+annual rate ) = (1+rp)^n
rp=ra/m