ABSTRACT
The time value of money is a concept used to explain present and future value calculations, as well as the rate of return and the cost of capital. This chapter aims to develop an understanding of the present value concepts and techniques. These tools can be applied to estimate: cash flows, the cost of capital, present values, net present values and, the role of uncertainty in the evaluation of new capital investments. The present value is the inverse of the future value. It is a principal that if held today grows to match a future payment or stream of payments due over n periods. The returns on new investment opportunities have been considered as certain. In reality, investment decisions are often based on expected rather than secured payoffs. For instance, consider the case of a US merchant who pays $100,000 for a load of grain that may be sold for $132,000 if the conditions of the economy are good.
