top of page

Capital Expenditure

Accounting (Year 12)

Time Value of Money

Content Writers

Christian Bien - Bloom Photo (1).jpeg

Christian Bien

What is Time Value of Money?

If someone offered you $10,000 today or $10,000 in 2 years time, which one would you choose? Of course most people would choose the $10,000 today, but why?

The simple answer is that the value of $10,000 today does not have the same value of $10,000 in 2 years time.

For example, if a bank account offered an interest rate of 2%, if you invested that $10,000 in two years you would have $10,404. (Year 1 = 1.02 * $10,000 = $10,200. Year 2: 1.02 * $10,200 = $10,404.) Time Value is the same concept, just in reverse - instead of asking what is the value of an investment two years down the track, it is how much is it worth now if I receive it two years later?

What is Future Value? - Example Investing $10k

Future Value is simply the monetary value in a future point in time.

For example, if we invest $10,000 at 2% per year, interest compounded annually, the future value would be $10,404. Year 1 = 1.02 * $10,000 = $10,200. Year 2: 1.02 * $10,200 = $10,404.

What is Present Value? - Example Investing $10k

Time value of money simply measures the reverse of the previous example. If we receive $10,000 in two years time, and the current interest rate is 2%, the value of the money is divided to present day.

Year 2 = $10,000

Year 1 = $10,000 / 1.02 = $9,803.92

Year 0 (Present Day) = $9,803.92 / 1.02 = $9,611.69

What is the Discount Rate?

The discount rate refers to the percentage of which we reduce an amount by to achieve a present day valuation. The discount rate is subjective and can consist of a variety of factors, such as risk profile of the investment, inflation or current interest rates.

For questions in your exam, your discount rate will always be provided.

How Do I Use the Annuity Table in the Specification Booklet?

The annuity table is provided by SCSA to provide a simple way to discount. The top table is for finding the discounted value where this is only one cash inflow. Remember the example above with the 2% annual rate over 2 years.

We can see in the top table, under 2% for 2 periods, the result is 0.9612. If we multiply $10,000 by 0.9612, we achieve the same result as above. = $10,000 * 0.9612 = $9,612. The bottom table is for multiple cash inflows, such as, if we received $10,000 per year.

The bottom tables are just accumulated tables of the above.

Image of Specification Booklet Provided SCSA WA.


You have pages remaining today.

Consider signing up, it's free!

bottom of page