Time Value Of Money And Its Applications In Corporate Finance: A Technical Note On Linking Relationships Between Formulas

Abstract

Time Value of Money (TVM) is the most important chapter in the basic corporate finance course. It is imperative to understand TVM formulas because they imply important TVM concepts. Students who really understand TVM concepts and formulas can learn better in chapters of TVM applications. This technical note intends to present more complete TVM formulas and link their relationships from the growing annuity perspective to assist instructors in teaching and students in learning. Although TVM formulas are already available in the textbooks, this technical note provides another perspective of presenting and summarizing TVM formulas. The simplification or extension of the growing annuity formula to reach other TVM formulas is discussed in this note. Keywords: Time Value of Money Formulas, The Growing Annuity 1. INTRODUCTION ime Value of Money (TVM) is the most important chapter in the basic corporate finance course in business education. 1 Students who really understand TVM concepts and formulas can learn better in TVM applications, such as bond valuation, stock valuation, cost of capital, and capital budgeting. Due to the technological advancement, TVM formulas are built in the financial calculator and students can utilize its function keys to work TVM calculations efficiently. Although financial calculators help students compute answers faster, understanding TVM formulas is still imperative because these formulas imply important TVM concepts. With solid understanding of TVM formulas, students are able to identify what the questions ask and compute the correct answers by using either formulas or function keys. When learning TVM, students may see many formulas listed in the textbook. Some students may think these formulas are difficult to understand because they are confused with these formulas. In fact, most of TVM formulas are closely related. When introducing TVM formulas, the instructor can classify them under different conditions and link their relationships to organize them. This way is easier for students to better understand these formulas and the essence of TVM. Moreover, students can learn better in TVM applications, taught in later chapters. TVM formulas are available in the textbooks. Some textbooks only list frequently used formulas while others include more formulas. In addition, different textbooks present and organize TVM formulas in different ways. This technical note intends to present more complete TVM formulas and link their relationships from the growing annuity perspective to assist instructors in teaching and students in learning. Although many TVM formulas listed in this technical note can be found in the textbooks, it provides another perspective of presenting and summarizing TVM formulas. The simplification or extension of the growing annuity formula to reach other TVM formulas is discussed in this note. The remainder of this technical note is organized as follows. Section 2 describes the growing annuity. Section 3 simplifies or extends the growing annuity formula to reach other TVM formulas and links their relationships. Section 4 concludes this note with tables summarizing TVM formulas discussed in section 3. T