Module 1 Tools of Finance Understanding the time value of money concept is key to developing a good grasp of how finance works. The time value of money means it is better to receive money sooner than later. The money received sooner can be invested to gain a return, which results in more money. Cash flows that are received in the future have a lower value than cash flows in the present time. This is important for companies and it is necessary that managers can use the tools of finance to value these cash flows. Cash flows occurring at different points in time can be brought back to a current time value known as the present value. Bringing cash flows back to the current time allows cash flows to be compared and for more informed decisions to be made on company investments. The basic set of tools that managers use are the techniques of present value and future value, using annuities to assist the valuations and expected return and standard deviation. The latter two tools gives an answer to the questions of what is the return an investment will make and what is the risk that is involved in producing that return. It is essential that the present value techniques are learned and understood. This is necessary for a better understanding of the valuation processes for bonds, stocks and projects. Without a good grasp of these techniques you will find it difficult to gain a proper understanding of finance. What you will learn here is how to value simple cash flows and how to use the statistical tables in the appendix. You will also learn where these techniques are used in everyday activities. It is important that you learn how to use the financial tables. Financial calculators will also help provide the answers to different problems, but they do not help build an intuitive feel for finance in the way the financial tables do. Financial calculators will deliver quick answers to complex problems, but for the finance course and for the exams a financial calculator is not necess