Mathematics of Finance – Time Value of Money

One of the central concepts of financial theory is Time Value of Money.  As a result of the capital intensive nature of real estate development and the extraordinary time needed to entitle, improve, and place the asset into service, investors become curious about their compensation for capital.  TVM calculations provide a basis for valuing a likely stream of income in the future to a present value through discounting these future cash flows at a rate of expected return.  By determining the “present value” of this future set of cash flows, the investor is able to compare alternative investments while accounting for time and risk. 

Regardless of your future position or profession, to the extent you understand the basic mathematical formulas, calculations, and spreadsheet functions, will allow you to make good decisions effectively.  Furthermore, understanding and mastering these functions will allow you to assess the sensitivity of returns to changes in basic assumptions. 

Time Value of Money