In evaluating capital

investment projects, current outlays must be judged against the current value

of future benefits. 

 Higher interest

rates (discount rates) reduce the present value of amounts to be received in

the future. 

In determining the future

value of an annuity, the final payment is not compounded at all

The farther into the future

any given amount is received, the larger its present value. 

Discounted at 6%, $1000

received three years from now is worth less than $800 received today. 

When the inflation rate is

zero, the present value of $1 is identical to the future value of $1. 

 The time value of

money is not a useful concept in determining the value of a bond or in capital

investment decisions. 

 Discounting refers

to the growth process that turns $1 today into a greater value several periods

in the future. 

 Compounding refers

to the growth process that turns $1 today into a greater value several periods

in the future. 

 The time value of

money concept is fundamental to the analysis of cash inflow and outflow

decisions covering periods of over one year.