The Time Value of Money: A Clarifying and Simplifying Approach

Abstract

The concept of time value of money is critical for business students, financial managers, and anyone who deals with money.  Financial managers must be able to employ TVM concepts competently in order to value both financial and real assets as they make decisions regarding capital budgeting, capital structure, and working capital management. Therefore business students must come to understand and apply correctly time value of money concepts. 

This brief note suggests a clarification and a simplification of the pedagogy of TVM, which will result in greater understanding for the student.  These suggestions include redefining the variable "n" in two of the TVM equations; dispensing with the pointless and purely semantic discussion of whether payments occur "at the beginning" or "at the end" of each period; and emphasizing the use of multiple-step problems.