The world of finance and investments has as its basis the time value of money, the assumption that one pound/euro/dollar is worth more today than it will be sometime in the future. For example, one unit of whatever currency can be invested to give an annual rate of return r and grow to 1 + r after one year. This means that £1 today is worth 1 + r pounds in one year. After two years £1 grows to (1 + r)(1 + r) = (1 + r)2. After n years it becomes (1 + r)n. The rate of return r is a number. If r = 0.1 it is the equivalent of 10 per cent.
The present value PV of an investment with a rate of return equal to r per year grows to a future value FV in the course of n years:
The value of receiving FV in n years’ time is PV:
Get Financial Modelling and Asset Valuation with Excel now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
