The Business and Finance outline does not have a section titled "time value of money," but the idea is spread across it: "loan financing expenses (interest, etc.)" under overhead, "cost of financing projects" under bids, lease vs. purchase under fixed assets, and cash flow management in Area D. In practice, B&F questions in this area are mostly simple interest, financing cost added to a bid, and the cost of skipping a supplier discount. Compound interest and present value are worth knowing because they explain why a dollar today beats a dollar next year, and they show up in lease vs. buy reasoning.
The Candidate Information Booklet sets rules for which calculators are allowed at the test center; check it before exam day. Everything on this page can be done on a basic calculator.
Simple interest
Interest = principal × annual rate × time (in years)
Time is in years, so months go over 12 and days over 360 or 365 (the question will say which).
Example 1: one-year loan
A contractor borrows $40,000 for equipment at 8% simple interest for one year.
$40,000 × 0.08 × 1 = $3,200
Example 2: financing a job until the first draw
A contractor borrows $150,000 at 9% to carry payroll and materials for 3 months until the first progress payment.
$150,000 × 0.09 × 3/12 = $3,375
That $3,375 is a real cost of the job and belongs in the bid. Forgetting to convert months to years (multiplying by 3 instead of 3/12) gives $40,500, a common wrong answer.
Example 3: monthly interest for overhead
$80,000 equipment loan at 9%: monthly interest = $80,000 × 0.09 ÷ 12 = $600.
Compound interest and future value
When interest is added to the balance and then earns interest itself, it compounds.
Future value = present value × (1 + r)^n
where r is the rate per period and n is the number of periods.
Example 4
$50,000 left in an account earning 6% compounded annually for 3 years:
| Year | Beginning | Interest at 6% | Ending |
|---|---|---|---|
| 1 | $50,000.00 | $3,000.00 | $53,000.00 |
| 2 | $53,000.00 | $3,180.00 | $56,180.00 |
| 3 | $56,180.00 | $3,370.80 | $59,550.80 |
Check: $50,000 × 1.06³ = $50,000 × 1.191016 = $59,550.80. Simple interest for the same period would be $9,000, so compounding added $550.80.
Present value
Present value runs the other way: what is a future amount worth today?
Present value = future value ÷ (1 + r)^n
Example 5: retainage collected later
A contractor will collect $100,000 of retainage in 2 years. If its money is worth 8% per year, what is that worth today?
$100,000 ÷ 1.08² = $100,000 ÷ 1.1664 = $85,733.88
The difference, about $14,266, is the cost of waiting. That is the time value argument behind pushing for early retainage release and prompt payment (see retainage).
Rule of 72
A quick estimate: money doubles in about 72 ÷ (rate in percent) years. At 6%, about 12 years; at 9%, about 8 years. Useful for checking whether an answer is in the right range.
Trade discounts: the hidden interest rate
Supplier terms like 2/10, net 30 mean: take a 2% discount if you pay within 10 days; otherwise the full amount is due in 30 days.
Example 6: the discount amount
A $12,000 invoice dated June 1, terms 2/10, net 30, paid June 9: $12,000 × 0.98 = $11,760.
Example 7: annualized cost of skipping the discount
Skipping the discount means paying 2% extra to keep $98 for 20 more days (day 30 minus day 10).
Approximate annual rate = (discount % ÷ (100 − discount %)) × (days in year ÷ (net days − discount days))
Using a 360-day year: (2 ÷ 98) × (360 ÷ 20) = 0.0204 × 18 = about 36.7% Using a 365-day year: (2 ÷ 98) × (365 ÷ 20) = about 37.2%
If the contractor can borrow on a credit line at 9%, borrowing to take the discount is far cheaper than skipping it. This is one of the most practical finance lessons on the exam: early-pay discounts are expensive money to give up.
| Terms | Approximate annual cost of skipping (360-day year) |
|---|---|
| 1/10, net 30 | (1/99) × 18 = 18.2% |
| 2/10, net 30 | (2/98) × 18 = 36.7% |
| 2/10, net 45 | (2/98) × (360/35) = 21.0% |
Lease vs. buy, in time value terms
When comparing a purchase with a lease or rental, a simple exam approach compares annual ownership cost (depreciation, interest, insurance, maintenance) with annual rental cost at the expected usage. A more complete analysis discounts each option's cash flows to present value and picks the lower cost. Either way, the cost of money is part of the cost of owning equipment. See depreciation.
Example 8
A lift rents for $1,800 per month. Owning one costs $13,500 per year in depreciation, interest, insurance and maintenance. The contractor expects to need it 9 months a year.
Rent: 9 × $1,800 = $16,200. Own: $13,500. Owning is cheaper by $2,700 at that usage. At 7 months of use, renting costs $12,600 and is cheaper.
Formula summary
| Concept | Formula |
|---|---|
| Simple interest | P × r × t |
| Future value (compound) | PV × (1 + r)^n |
| Present value | FV ÷ (1 + r)^n |
| Cost of skipping discount | (d ÷ (100 − d)) × (year ÷ (net − discount days)) |
Practice financing math
Our Florida Business and Finance Exam Prep includes original interest, financing cost and discount questions, each worked step by step, and 90 days of practice across the full exam. Related: financial ratios, job costing and estimating and the B&F exam overview.
Practice questions
A contractor finances a $40,000 equipment purchase with a one-year simple-interest loan at 8%. How much interest is due at maturity?
- A$3,200
- B$320
- C$4,000
- D$32,000
Show answer
Answer: A. Simple interest = principal × rate × time = $40,000 × 0.08 × 1 = $3,200. $320 results from misplacing the decimal (0.8%).
Source: Simple interest
To carry a job until the first progress payment, a contractor borrows $100,000 at 9% simple annual interest for 4 months. What financing cost should be included in the bid?
- A$9,000
- B$750
- C$36,000
- D$3,000
Show answer
Answer: D. Interest = $100,000 x 0.09 x 4/12 = $3,000. $9,000 is a full year's interest, and $36,000 multiplies by 4 instead of 4/12.
Source: Simple interest I = P x r x t (verified in Python)
A contractor finances an $80,000 equipment purchase at 9% simple annual interest. What is the first month's interest expense to include in overhead?
- A$7,200
- B$600
- C$720
- D$6,667
Show answer
Answer: B. Monthly interest = $80,000 × 9% ÷ 12 = $600. $7,200 is a full year of interest.
Source: Standard accounting/business principle (verified with Python where calc)
Under terms of 2/10, net 30, skipping the discount amounts to paying 2% to keep the money 20 extra days. Using a 360-day year, the approximate annualized cost of skipping the discount is:
- Aabout 2%
- Babout 36.7%
- Cabout 24%
- Dabout 10%
Show answer
Answer: B. Cost = (2/98) x (360/20) = 0.02041 x 18 = 36.7%. Simply annualizing 2% without the 98 base gives 36%, and 2% ignores the time element entirely.
Source: Standard accounting/construction-management principle
A contractor can borrow on its credit line at 9% per year. Supplier terms are 2/10, net 30. Ignoring compounding, should it borrow to take the discount?
- ANo—2% is less than 9%
- BNo—borrowing always costs more than a discount
- CYes—the discount's annualized cost (about 37%) exceeds 9%
- DIt makes no difference
Show answer
Answer: C. Forgoing the discount costs about (2/98) × (365/20) ≈ 37.2% per year, far above the 9% borrowing rate, so borrowing to pay early is cheaper. Comparing 2% to 9% directly ignores that the 2% is earned over only 20 days.
Source: Standard accounting principles
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