The time value of money and financial functions

"Well, you gotta spend money to make money, Lou."
-Chief Wiggum

The time value of money is a core concept in finance and refers to the idea that money has earning potential. This means that, money available now is worth more than money available in the future; if you have it now, it can earn you more money. If you have to wait you miss this opportunity.

A real world example could be as simple as putting £2000 in to savings account to earn interest; the sooner you do it, the sooner you start earning interest (and start climbing the compound interest curve).

The consequence of the changing value of money means that really, any sum of money has at least two values - its present value (PV), which is what it's worth now, and a future value (FV), which refers to what it might be worth in the future. It also has different, intermediate values at any time point in between.

These definitions can extended to cash flows, allowing one to calculate the value of a potential investment that will initially cost a lump sum, then provide a regular income, for example.

Matlab has functions in the financial toolbox to calculate these values, but for those without the financial toolbox, or those interested in understating the calculations and learning how to implement these concepts in Matlab, here are a couple of alternative functions and introductions to the calculations. I'll extend this list as I add new functions.

• Future value of a lump sum - fvLump.m - for calculating the future value of cash available now, depending on the interest rate available and whether simple or compound interest is applied.
• Present value of a lump sum - pvLump.m - for calculating the present value of a lump sum of cash available in the future, depending on the expected interest rate.
• Future value of a cash flow - nfvFlow.m - for calculating the future value of a cash flow.
• Present value of a cash flow - npvFlow.m - for calculating the present value of a cash flow.
• Internal rate of return - coming soon.

Some other functions that maybe useful for financial calculations include:

• Simple moving average - movAv.m - a simple moving average function for data including time series, similar to tsmovavg in the financial toolbox.
• Weighted moving average - movAv2.m - a moving average function allowing weighting and setting of lead and lag for data including time series, similar to tsmovavg in the financial toolbox.