Explain the difference between compounding and discounting of cash flows.
Calculate the present and future value of single sums, ordinary annuities, and annuities due.
Calculate the present value of mixed-stream cash flows, a deferred annuity, and a perpetuity.
Employ time value of money calculations to solve basic financial planning issues.
Most long-term projects have cash flows that occur at various points in time. Given that the passage of time impacts the value of cash flows, the value of a project is dependent on how we assess these differences in cash flow timing. The purpose of this chapter is to develop the tools necessary to evaluate cash flows over time in order to make better decisions. The ability to correctly apply these tools is essential to understanding and using the theories, techniques, and methods of finance. The time value of money serves as a basis for almost all other topics covered in this text.