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tvmbeginner20 min
TVM Exam Workflow
A practical process to solve TVM problems quickly and accurately on exams.
What You'll Learn
- ✓Map cash flows on a timeline
- ✓Pick the correct formula for each scenario
- ✓Check reasonableness of your answer
1. Build the Timeline
Write time 0 through n and place every cash flow exactly where it occurs. This single step prevents most TVM errors.
Key Points
- •Never skip timing
- •Signs matter: outflows are negative
- •Label each period clearly
2. Match Rate and Period
If periods are monthly, your rate must be monthly too. Divide APR by 12 for monthly, 4 for quarterly.
Key Points
- •Convert APR when needed
- •Watch compounding frequency
- •EAR converts to any compounding
3. Choose the Right Formula
Single sum: PV/FV. Equal payments: annuity. Infinite equal payments: perpetuity. Mixed: discount each individually.
Key Points
- •Annuity requires equal and evenly spaced payments
- •Growing perpetuity needs g < r
- •Uneven flows require individual discounting
Key Takeaways
- ★Most errors are timing or unit mismatches
- ★A quick estimate catches major calculator mistakes
- ★Annuity due = ordinary annuity × (1+r)
Practice Questions
1. If FV is fixed, what happens to PV when r rises?
PV falls because future cash flows are discounted more heavily.
2. A $100/month payment for 3 years at 12% APR: what is n and r?
n = 36 months, r = 1% per month.
FAQs
Common questions about this topic
Memorize core forms (PV, FV, annuity, perpetuity) and rely on timeline logic for the rest.
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