Describe the time value of money

Describe the time value of money

Answers

- A sum of money is more valuable the sooner it is received. A dollar today is worth more than the promise of a dollar
tomorrow due to: Inflation and risk
- Before you invest money in a project you must compare its rate of return against other opportunities (other projects).
- FV = PV(1 + i) n

Where: FV = Future Value of an investment (project)
PV = Present Value of that same investment
i = Interest rate, discount rate or cost of capital
n = Number of years
Example: Invest

$1000 today (PV) for 1 year(n) at an interest rate of 10% (i), the investment is worth$ 1000(1+.1) 1 or

$1210 at the end of year one - When you have two different investments with varying rates of return, You must find a way to put both on equal terms. - You put both on equal terms by evaluating all future cash flows at time zero (or today) PV = FV (1+i) n - Example: You have a project that promises you$ 1000 of profit at the end of the first year with the discount rate at 10%
PV =

$1,000 =$ 909
(1+0.1) 1
Therefore project is worth only $909 today

francis1897 answered the question on March 13, 2023 at 08:33

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