Time Value of Money - Financial management, Transcriptions of Financial Management

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David is the founder of the now world-famous website and Youtube channel MBAbullshit.com with 1 MILLION+ FREE tutorial video views worldwide on YouTube (as of May 2012)

Before anything else…

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This book aims to explain some the most "seemingly complicated" topics in these fields in a conceptual way, rather than explaining the common "how to calculate" way, which is much, much better explained and more easily understood in my step-by-step easy and quick tutorial videos (basic videos are FREE!) on my website www.MBAbullshit.com. *Please see Disclaimer, Terms and Conditions on the last page.

Hey wadup!

What do they TRY to teach you in business school but HARDLY explain well?

Whenever we read our textbooks in business school, we often get very confused about all these different concepts which look scary and complicated. More often than not, these scary concepts are found in the fields of Accounting, Financial Management, and Quantitative Analysis.

Here you will learn to lose that fear, and realize that the “scaryness” was only in the way it was presented to you in the past; and that there’s really nothing to be afraid of!

David

After you understand these concepts, you'll be surprised at how much easier the calculation part will become, whether you learn it from your professor or from my many FREE and easy tutorial videos on MBAbullshit.com.

These first 5 concepts are extremely important to business school, especially in the fields of finance and quantitative analysis. Why? Because so many of the other concepts depend on these five! It's amazing the way people try to "jump" to more complicated concepts which depend on these first five, without first learning these first five. Sorry… that just won't work! You must learn these first five concepts first, and you must master them. Only then should you move onto more complicated concepts like perpetuities, annuities, stock and bond valuation, cost of capital, and many more!

So okay then… let's have fun with our first concept!

Future Value

Translation of the Bullshit

This is actually a very simple concept. Let's say you put $100 in the bank and it earns interest. Next year, because it earns interest, your money will grow to (for example) $105.

So now, what is the "Future Value" of your $100? Simple! $105. That's it, that's how simple it is. In the "future" (1 year from now), your $100 will be $105. How do you compute how much the $ (or any other amount) will be exactly 1 year (or any number of years) from now? Simple! You use the Future Value Formula; which is best explained in a step-by-step tutorial video instead of a book.

stocks” (small stock costing less than a dollar) in the stock market costing $0.33 cents each.

Let’s say that after 1 year, each stock goes up in value by just another tiny $0.66 cents to $0. cents, which is 3X the value of the original $0. cents (with penny stocks, it’s amazing the way a tiny $0.66 cents increase can already triple your money!). This means that your initial $700 will now be worth $700 x 3 = $2,100. What if you could do that even just once a year for only 7 years? How much will you have? $10,000? $20,000? Maybe even (super lucky long shot!?) of $100,000?

Nope… your $700 would have turned into (more than) $1.5 MILLION DOLLARS!

See the power of future value compounding? And that’s even if you could be this successful, on average, even just once a year.

*By the way, although not the focus of this (basic) book, if you’re interested in trying out “penny” stocks, my affiliate Matt Morris is giving away three (3) FREE stock microcap stock picks as well as a FREE instantly downloadable PDF report on “How To Get Started With Penny Stocks In a Few Days” if you click here. Of course, remember that

penny stock and microcap stock investing can be very risky, and conservative investors simply can’t stomach it.

It’s extremely easy to open a stock brokerage account online with very low investment nowadays using well-known companies like TDameritrade.com and ScotTrade.com, who’s minimum deposit is only around $500 (I’m not affiliated with them in any way). However, investing in penny stocks and microcaps stocks is for a very special type of “aggressive investor” who’s willing to “tough it out” with the risk and is not for everyone.

While it’s possible that your $700 could quickly turn into the $1.5 million dollars and change your life forever , you could also lose the entire $700.

Only you can decide whether you’d be willing to risk your $700 to possibly earn $1.5 million dollars really quickly using penny stocks and/or microcap stocks.

In any case, it doesn’t hurt to just have a look and download the FREE PDF report on penny stocks and 3 FREE stock picks here.

Present Value

Now that we know the concept of Future Value, let's go to the next concept of Present Value. What is the "Present Value" of today's $100? It is also $100! Why? Because "present" means "today". So it is $100 today (present value), and it will be $105 next year (future value).

Now, what if you have $100 in the bank today. However, this money in the bank has been earning interest already for 1 year. Let's say (for example) that 1 year ago, this money was only a bit more than $95 (let's just use $95 to simplify), and then it earned interest throughout the year, and so now it's worth $100. What is the "Past Value" of your $100? Again, simple! It is $

So… for your $100 today, the Present Value is $100, the Past Value is $95, and the Future Value is $105.

However, this was just a very simple example to demonstrate the concept. The main challenge in business school or in actual business is finding out the exact numbers of your Future Value, Present Value, and Past Value, using scary looking but very simple formulas.

The best way to learn how to use formulas and do calculation is not from a book. You should see it in action on a tutorial video. Luckily, I have FREE tutorial videos on these topics on my website MBAbullshit.com. (If you want to see my FREE videos on how to use these formulas, just go to MBAbullshit.com)

about it for now), and you'll come up with the past value of a bit more than $95.

2. In another separate example, let's say that next year you will have $105 after earning interest for 1 year. How much is it worth today? Use the same present/past value formula in number 1) and you will come up with the present value of $100.

To see this formula in action, I highly recommend you check out my FREE video on this topic at MBAbullshit.com.

Unfortunately, many professors and textbooks use the terms "Present Value" and "Past Value" interchangeably just because they have the same formula, and this "interchanging" adds to the confusion.

Therefore, I recommend using these 2 different terms separately, to avoid going nuts!

Net Present Value (NPV)

i.e. "Combination of Many Present Values"

After you've learned Present Value, Net Present Value is actually a very simple concept. It's nothing more than many "present values put together".

So, to illustrate: Your grandma promises to give you a gift of $ exactly 2 years from now. Let's say that using the present/past value formula (don't worry about that for now), you find out that the present value (today's value) of $110 two years from now is $100 today.

Let's also say your boss will give you a bonus of $200 1 year from now. And then, using the present value formula, you find out that the present value (today's value) of that bonus is $190.

positive). What if one was negative? What if, instead of getting a gift from your grandma 2 years from now, you instead promised her that you would pay her $110 to help her out with her retirement? Using the same present/past value formula, you will find that $110 two years from now is equal to $100 today (exactly like in the first example above). However, this time you should consider it a negative cash out flow on yourself, because you are paying it rather than receiving it. Therefore, the Present Value of your negative -$110 two years from now is a negative -$100 today.

So in this case, how would we get your today's Net Present Value of both your bonus next year and your payment to your grandmother two years from now?

Simple!

Combine present value of payment to grandma (negative -$100) plus present value of bonus from boss (positive +$190) to get a Net Present Value of $90. See? Not so complicated after all. So that's it for the concept. There's a shortcut formula for calculating the Net Present Value, and you can watch the formula in action on my FREE video at MBAbullshit.com.

Accumulated Value

i.e. Net "Future" Value

Okay, so now we that we know the concept of Net Present Value, it's time to go to something similar.

Remember, Net Present Value is the combination of many present values today, at this same point in time.

What if we were to get the combination of many future values at one point in the future?

We should call that the "Net Future Value" or "NFV", right? Actually, although it is, in essence, a "net future value", the "official" name is Accumulated Value.