**Time value of money (TVM)** is represented by the difference in value of some dollar amount of money or cash flow(s) over a period of time, assuming one can earn some sort of return on the money available.

**Simple interest** is calculated on the principal only while **compound interest** is when one also earns “interest on interest.” **Compounding** may be used to describe moving a value or cash flow forward in time:

Future Value=FV

Present Value=PV

# of years=n

Cash Flow/Payment=PMT

nominal rate of interest=i

FV = PMT(1+i)^n

You have $50,000 to invest. If you think you can earn 7.5% annually, how much might you accumulate in 30 years?

**Discounting** is known as the process of moving a value or cash flow backward in time:

PV = PMT/(1+i)^n

If you’d like to have $50,000 in 5 years, how much might you have to invest today assuming a 5% rate of return?

**Real returns** are sometimes described as the rate of return one receives net of **inflation** but may be more accurately calculated:

Real rate of return=r

Inflation Premium=IP

r=[(1+i)/(1+IP)]-1

One should consider the effect of taxes on earnings as well.