Time Value of Money Made Simple: A Graphic Teaching Method
Valeria V. Martinez · 2013
A presented integrated time value of money graphic method helps students visualize and achieve a clearer understanding of time value of money. This tool helps students determine what type of time value of money problem they are dealing with as well as identify the variables involved in the problem. This method can be used as a visual aid to help students solve a problem when working with formulas or a financial calculator, or it can be used as the basis for a personalized time value of money spreadsheet template. This allows the students to understand the intuition behind time value of money concepts and problems and also helps them become proficient in the use of a financial calculator and/or spreadsheets to solve the problems. The tool developed in this paper will help our students be better prepared for careers in the fields of finance and accounting.(ProQuest: ... denotes formulae omitted.)INTRODUCTIONTime value of money is a very important topic in finance because it represents the building block and basic tool for many other fundamental topics such as bond valuation, stock valuation, capital budgeting, and options valuation. Unfortunately it is also a very challenging topic for students.For many of our students, understanding what the time value of money problem is asking and what variables are involved in the problem can be a daunting task. And even though they may cover time value of money in more than one course, for many of them it continues to be a challenging theme.Time value of money is commonly covered in introductory or basic finance courses, and is the stepping stone for more advanced topics. Most introductory finance books currently address the topic using a combination of formulas, time lines, and boxes of spreadsheet and financial calculator examples. However, time value of money problems are presented in a disintegrated manner, and sometimes they are spread out in more than one chapter or topic of the book (Jalbert, 2002). This makes it hard for the students to grasp the concepts and find a structured method to solve these types of problems, as well as understand the differences and similarities between solving annuity, lump sum, perpetuity or mixed cash flow stream problems.The purpose of this work is to provide a graphic template to help students visualize the problem at hand and achieve a clearer understanding of time value of money so they can consistently solve problems correctly in a timely manner. The tool that I develop throughout this paper is a visual aid that helps students determine what type of time value of money problem they are dealing with and also helps them identify the variables involved in the problem.The time value of money graphic method can be used as a visual aid to help students solve a time value of money problem when working with a financial calculator or formulas, or it can be used as the basis for a spreadsheet template for students to build their personalized time value of money spreadsheet.LITERATURE REVIEWVery little work has been done on the topic of alternative ways to teach time value of money. Eddie and Swanson (1996) develop a methodology to teach time value of money which focuses on the use of timelines and the concept of inflows and outflows of funds. Their method avoids any type of memorization or use of algebraic formulas. Jalbert (2002) finds that the most popular finance books lack precise definitions and organization of time value of money topics throughout the texts. He develops a technique to help students better grasp time value of money. His technique involves the use of time lines, a flow chart, and a matrix.Jalbert, Jalbert, and Chan (2004) continue the discussion from Jalbert (2002) and offer a simplified version of the technique presented in Jalbert (2002) targeted to students who have difficulty understanding the annuity concept.While Eddie and Swanson (1996), Jalbert (2002), and Jalbert et al. …