MODULE 2 - TIME VALUE OF MONEY

Time Value of Money



Time Value of Money

Introduction

The valuation of cash counts on time. A dollar today is worth more than a dollar tomorrow or years to come, the simple reason being the dollar (in hand today) could be used to earn interest if invested today (also factors like Inflation comes to play). The concept of value of money deals with the elementary concepts covered in Mathematics, of Interest (Simple and Compound). In a genuine life scenario, easy interest is not used much, as the comes back on easy interest are fractional compared to aggregate Interest for a specific period of time. Hence two key things to consider are

1. Compounded Rate

2. Discounted Rate

The time worth of cash is basic to cash management. It is the key to accepting stocks, bonds, financing your loans, and making fine business investments. It's the cause why lottery victors often take lump-sum payments at a 40-50% discount of the jackpot value. And, it's the reason why some checking accounts aren't really free. The time worth of money intuitively: $100 now is better than $100 one year from now. One reason we prefer money today is because then we have the option to immediately spend it on something we want (rather than wait one year). Your preferences specify how vital this issue is to you. Another reason we want money now instead of later is so that we have the opportunity to invest the money and gain interest. In supplementary words, we can calculate the opportunity cost of receiving the money later. Inflation has the reverse effect on the time value of money. Because of the constant decline in the purchasing power of money, an un-invested dollar is worth more in the present than the same un-invested dollar ...