TIME VALUE OF MONEY AND INVESTMENT ANALYSIS
INTRODUCTION
This document contains explanations and illustrations of common Time Value of Money
problems facing agricultural and agribusiness firms. The accompanying spreadsheet files contain
applications that mirror each section of the booklet, and provide the tools to do real-time computations
and illustrations of the ideas presented in the text. Taken together, they provide the capacity to analyze
and solve a wide array of real-world investment problems.
Time Value of Money problems refer to situations involving the exchange of something of value
(money) at different points in time. In a basic sense, all investments involve the exchange of money at
one point in time for the rights to the future cash flows associated with that investment. Expressing all of
the values that are exchanged in terms of a common medium of exchange, or money, allows different
sets of products or services to be compared in terms of a single standard of value (e.g., dollars).
However, the passage of time between the outflows and inflows in a typical investment situation results
in different current values associated with cash flows that occur at different points in time. Thus, it is
not possible to assess an investment simply by adding up the total cash inflows and outflows and
determining if they are positive or negative without first considering when the cash flows occur.
There are four primary reasons why a dollar to be received in the future is worth less than a
dollar to be received immediately. The first and most obvious reason is the presence of positive rates
of inflation which reduce the purchasing power of dollars through time. Secondly, a dollar today is
worth more today than in the ...