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### Course: Finance and capital markets>Unit 1

Lesson 5: Present value

# Time value of money

Why when you get your money matters as much as how much money. Present and future value also discussed. Created by Sal Khan.

## Want to join the conversation?

• Well, Sal had talked about Present and Future value of money in this video, Is there (if any) Past value of money also?
• Yes, you can simply divide the present value by the risk-free interest rate over time, to get the "past value" at a given year that you would need to have invested in order to obtain the present value.

Please note that the Alf Lyle answer is totally wrong. Adjusting for "inflation" in the past is not remotely the same as calculating the present or future value of money for a given interest rate. Adjusting for inflation is a completely different concept, which is covered in these videos: https://www.khanacademy.org/economics-finance-domain/core-finance/inflation-tutorial
• is the risk free interest rate determined by economic factors? What are some things that determine that rate?
• The shortest term interest rate (overnight lending rate) is determined by the central bank. The level of this interest rate is traditionally decided based on employment levels and the inflation rate.
• Quaker State Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take \$8,000 at the date of employment plus \$20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options? Question: I cannot figure out which formula to use. FV, PV, FVA FVAD, PVA, or PVAD
• If the employee gets a lump sum of: 57,737. Well first you would want to figure out what is the FV of each of the installments, and sum them all up. After that, once you know the amount he would get by installments, you then figure out the PV of that amount.
• How do you divide money? Like \$267.33 / \$44.00.
• come on !! when you divide it. just ignore the decimal of 267.33 and consider it as 26733 and add 100 with 44. thats it !!
• Is there a video for percentage increase etc sorry if it is here I haven't looked yet!
• An example: Note your starting number. For example, in the first six months of last year, you spent \$5,000 on advertising.

Compute the number for that same category in current dollars. This year, your advertising expenditures for that same period are \$5,500.

Subtract the old number from the new number. In this case, \$5,500 minus \$5,000. You had an increase of \$500.

Divide the increase (\$500) by the original starting number (\$5,000). The resulting decimal, .10 or 10 percent , is the percentage increase from last year to this year. The same formula applies to decreases.
• Will there be a time value of money if a country experiencing deflation?
• The concept of time value of money remains (numerically speaking). But the value of the amount held will increase because of deflation (the purchasing power increases).
• is risk free interest good to use in life?
• It's useful for making investment decisions.
(1 vote)
• Would you want 100\$ or 120\$ when 100\$ has risk free intrest
• At , you said it was high by historical standards. Do you mean that it has been that high, or is it impossible to have such a high interest rate?
(1 vote)
• Nothing is impossible. High by historical standards means you don't see it very often in history.