Finance Fundamentals Crash Course: Time Value of Money

Learn how compound interest earns interest on interest to grow your wealth over time, and apply the future value of money formula to see exponential growth.

Use Excel's future value function to compute the balance of a $100 deposit at 6% over 20 years, explaining pv, rate, nper, end-of-period type, and why pv is negative.

Explore the time value of money by calculating compound interest on a $100 deposit at 6% APR compounded yearly, showing year-by-year balance growth and interest earned.

Learn to compute future value using the formula present value times one plus rate to the nth power. Apply this method to project balances over multiple periods with ease.

Compounding frequency drives the future value at a given APR. In a $1,000, 20% APR example, annual, quarterly, monthly, and daily compounding produce different end-of-year balances.

Compute present value by discounting future cash flows using the present value formula and discount rate, illustrated with a $40,000 target in two years and a $1,300 versus $1,000 choice.

Use Excel's present value function with a 15% rate to compare $1,300 in two years to $1,000 today; compute PV to show taking the payment today yields higher present value.

Calculate the present value of a stream of cash flows by discounting each cash flow and summing, using Excel's PV function for uneven payments, illustrated with a Powerball jackpot choice.

Evaluate the true costs of decisions through opportunity cost, the cost of forgoing an opportunity, and consider holistic costs like the alternatives you could pursue.

Understand the opportunity cost of capital as the funding price for projects and how the weighted average cost of capital discounts future cash flows to assess value.

Evaluate projects using the time value of money by discounting future cash flows with the cost of capital, comparing present values to assess opportunity costs.

Compute net present value by subtracting the initial investment from the present value of cash inflows, using the cost of capital as the discount rate; a positive NPV indicates profitability.

Calculate the net present value of a $2,000 investment and $400 annual receipts for six years using Excel's NPV function at 4%, excluding the initial outlay to yield $97.

Identify the internal rate of return, IRR, as the break-even cost that zeros NPV. Use Excel's IRR formula to compute it and assess NPV changes.

Use NPV and IRR to decide investments, accepting positive NPV and projects with IRR above the cost of capital while noting their limitations.

Builds a solar farm financial model to estimate revenue from locational marginal prices and production, then compares Baker and Sacramento NPVs under a 13% cost of capital.