Business Finance Decisions: valuation basics, investment cases and risk

01

Time value of money: the decision toolkit

In simple words

A dollar today is worth more than a dollar next year, because today you could use it, save it or pay off a debt. So when money arrives later, we shrink it a little to compare it fairly with money today. That shrinking is called discounting.

Before this course: Financial Statements for Owners: income statement, balance sheet and ratios (course 2.31.3), which builds on Business Math 2 (course 2.31.2). You should already read the three statements, calculate ratios, build scenarios with a switch cell, run a 10% sensitivity test and use the PMT function. This course uses those skills to make and lead bigger money decisions.

Key facts

Future value (FV) = today's amount x (1 + rate) ^ years. Example: $1,000 at 8% a year for 3 years = 1,000 x 1.08^3 = $1,259.71.
Present value (PV) = future amount / (1 + rate) ^ years. Example: $1,000 received in 3 years at 8% is worth 1,000 / 1.08^3 = $793.83 today.
Discount factor = 1 / (1 + rate) ^ years. At 10%: year 1 = 0.9091, year 2 = 0.8264, year 3 = 0.7513, year 4 = 0.6830, year 5 = 0.6209.
Discount rate (textbook idea): the return you give up by putting money into this project instead of the next best use, plus extra for risk. Many businesses set one hurdle rate for normal projects and a higher one for riskier projects. The rate is a management choice: write down why you chose it.
Opportunity cost: money tied up in a new oven cannot also pay down a loan or sit in savings. The discount rate puts a number on that.
Inflation: if your cash-flow forecast includes expected price increases, use a discount rate that also includes inflation. Mixing the two styles (one with inflation, one without) gives wrong answers. Each country's central bank publishes its inflation goal (see the box).

In your country

The Bank of Canada's inflation target is 2% (the midpoint of a 1% to 3% control range), measured by total CPI year over year.
Source: Bank of Canada, inflation: www.bankofcanada.ca/core-functions/monetary-policy/inflation/

The Federal Reserve's FOMC judges that 2% inflation over the longer run, measured by the PCE price index, is most consistent with its mandate.
Source: Federal Reserve, Why does the Fed aim for inflation of 2 percent: www.federalreserve.gov/faqs/economy_14400.htm

The central bank is the Bangko Sentral ng Pilipinas (BSP). Its primary objective is to maintain price stability conducive to balanced and sustainable growth of the economy and employment (RA 7653 as amended by RA 11211).
Source: RA 11211 text: lawphil.net/statutes/repacts/ra2019/ra_11211_2019.html

The central bank is the People's Bank of China. The government's 2026 work report set resident consumer price growth at about 2%; this is a government target, not a statutory central-bank mandate.
Source: 2026 targets (CNIPA copy of the work report summary): www.cnipa.gov.cn/art/2026/3/5/art_3635_205070.html

The Bank of Japan set its price stability target at 2% in January 2013, measured as the annual change in the consumer price index.
Source: Bank of Japan, Outline of monetary policy: www.boj.or.jp/en/mopo/outline/index.htm

The Bank of Korea's inflation target is 2%, measured by the year-on-year change in the Consumer Price Index, applied from 2019.
Source: Bank of Korea: www.bok.or.kr/eng/main/contents.do?menuNo=400015

Step by step

Open a new workbook and make a tab called Inputs. Put the discount rate in its own labelled cell (for example B1 = 10%).
In a row, type years 0 to 5. Under each, calculate the discount factor: =1/(1+$B$1)^A3 (cell names can differ in your sheet).
Check two answers by hand: $1,000 in 3 years at 8% should be $793.83, and $1,000 for 3 years at 8% should grow to $1,259.71.
Write three sentences: what your next best use of money is, how risky this kind of project feels, and why you picked your rate.
Write whether your forecasts include inflation, and make sure your rate matches.
Check: changing B1 changes every discount factor, and nothing is typed in by hand.

Watch on YouTube

Time value of moneyKhan Academy · YouTube · youtube.com

Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.

LESSON 01Time value of money: the decision toolkit

LESSON 01 / ANIMATED LESSON / AI VOICE00:00 / 01:10

Voice

Read the video script

[Host] "Would you rather have a thousand dollars today or a thousand dollars in three years?"
[Text on screen: PV = FV / (1 + r)^n] "Money later is worth less today. At 8 percent, a thousand in three years is worth 793 dollars and 83 cents now."
[Text on screen: Discount rate = next best use + risk] "The discount rate is what you give up, plus extra for risk."
[Text on screen: Inflation in both, or in neither] "If your forecast includes inflation, your rate must too."
[Host] "Every decision in this course starts here: put the rate in one cell and write why."

Try it now

Build the discount-factor row for 8%, 10% and 12%. For each rate, find the present value of $5,000 received in year 4. Write one sentence on why higher rates make future money worth less.

ClaudeStuck? Copy a ready-made prompt for Claude

Copy this, open Claude, paste it, and Claude will walk you through the lesson step by step.

For a grown-up: Claude is for adults (18+). Copy this, paste it into Claude, and use the answer to explain the lesson to your child.

I'm learning "Business Finance Decisions: valuation basics, investment cases and risk" on The Future Market. Lesson 1: "Time value of money: the decision toolkit".

What the lesson teaches:
- Future value (FV) = today's amount x (1 + rate) ^ years. Example: $1,000 at 8% a year for 3 years = 1,000 x 1.08^3 = $1,259.71.
- Present value (PV) = future amount / (1 + rate) ^ years. Example: $1,000 received in 3 years at 8% is worth 1,000 / 1.08^3 = $793.83 today.
- Discount factor = 1 / (1 + rate) ^ years. At 10%: year 1 = 0.9091, year 2 = 0.8264, year 3 = 0.7513, year 4 = 0.6830, year 5 = 0.6209.
- Discount rate (textbook idea): the return you give up by putting money into this project instead of the next best use, plus extra for risk. Many businesses set one hurdle rate for normal projects and a higher one for riskier projects. The rate is a management choice: write down why you chose it.
- Opportunity cost: money tied up in a new oven cannot also pay down a loan or sit in savings. The discount rate puts a number on that.
- Inflation: if your cash-flow forecast includes expected price increases, use a discount rate that also includes inflation. Mixing the two styles (one with inflation, one without) gives wrong answers. Each country's central bank publishes its inflation goal (see the box).

The exercise I'm working on:
Build the discount-factor row for 8%, 10% and 12%. For each rate, find the present value of $5,000 received in year 4. Write one sentence on why higher rates make future money worth less.

I'm stuck. Please:
1. Explain the main idea in plain, simple words with one everyday example.
2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step.
3. Don't just give me the final answer. Help me do it myself, and check my work when I share it.

I'm a parent helping my child (about 8 years old) with a lesson called "Time value of money: the decision toolkit" from the course "Business Finance Decisions: valuation basics, investment cases and risk".

Here's what the lesson says:
A dollar today is worth more than a dollar next year, because today you could use it, save it or pay off a debt. So when money arrives later, we shrink it a little to compare it fairly with money today. That shrinking is called discounting.

The activity:
Build the discount-factor row for 8%, 10% and 12%. For each rate, find the present value of $5,000 received in year 4. Write one sentence on why higher rates make future money worth less.

Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words.
Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time.

Open Claude

Sources

Present value, future value and discount rates are standard finance textbook formulas; all numbers are made up.
Central bank inflation goals: see the official sources in the In your country box.

My notes

I learned this

02