Valuation and investment
Time value of money
Money today is worth more than the same money later.
Facts checked against sources onWhat does Time value of money mean?
Money today is worth more than the same amount in the future, because today's money can be invested to earn a return and because future money is less certain. This is why future cash flows are discounted before they are compared with money spent today.
Where does it come up in case interview prep?
- The business case for automation: payback, utilization risk, and peopleLesson in Making operations better, and planning for what can go wrong
- Service delivery, KPIs and public-private partnershipsLesson in Government, public sector and non-profits
- PricingLesson
- Investment and capital project decisionsLesson
Related terms
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- Net present value (NPV)Today's value of all future cash flows, minus the upfront investment.
- Return on investment (ROI)The gain from an investment relative to its cost.
- Payback periodHow long until an investment earns back its cost.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- DCF (discounted cash flow)Valuing a business from the future cash it will generate.
- Enterprise value (EV) and EV/EBITDAThe value of the whole business, to lenders and owners together.
Learn it in context
See Time value of money at work in a lesson from Making operations better, and planning for what can go wrong, with checks as you go.
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