Assigning Value with TVM

We’ll start with arbitrary round numbers for our variables in this section. In later sections we’ll explore how to determine things like the discount rate but for now take the rate as given.

Let’s say we have $100 today, and our discount rate is 5%. What’s the value of our money next year?

Here is the formula to “discount” value year-over-year:

You are dividing your amount by 1 + the discount rate

In other words, given a 5% discount rate, $100 today will be worth the same as $95.24 in one year