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The following cash flow diagram shows a loan from the
lender's point of view:
Time value of money (TVM)
Time-value-of-money (TVM) calculations make use of the
notion that a dollar today will be worth more than a dollar
sometime in the future. A dollar today can be invested at
a certain interest rate and generate a return that the same
dollar in the future cannot. This TVM principle underlies
the notion of interest rates, compound interest, and rates
of return.
Cash flow diagrams
also specify
when
payments occur rela-
tive to the compound-
ing periods.The
diagram to the right
shows lease pay-
ments at the
begin-
ning
of the period.
This diagram shows
deposits (PMT) into an
account at the end of
each period.