Question

Discuss with an example why a Dollar today is worth more than a dollar in the futur?
(Answer should be 250 words)

Answer 1

• Money has a time value as money today can be invested to make more money.
• Because of this, a dollar received in future has a lesser value than the dollar received today.
• And, a dollar received today has more value than dollar received in future because it can be invested to make more money.
• The time value of money means a dollar today is worth more than a dollar in the future because of the inflation.
• Inflation increases prices over time and decreases the spending power of dollar.
• Risk and return say that if one is risking his dollar, then he expects return of more than the amount of dollar risked.
• A dollar in future will not be able to buy the same value of goods as the dollar today can.
• This way, a dollar today is more worth than the dollar in future.
• The time value of money is a concept which states that specific amount of money is worth more today than an identical amount in the future.
• The reason is because of the earning capacity of money.
• Assuming a positive interest rate environment, one can invest your money now and earn a certain amount in interest.
• Since the money has earned interest with time, it is worth more now.

For example, Assuming that the interest rate is 10%

$100 today is more valuable than $100 in one year.

This is because if we have $100 today, we can invest it and it will make 10% annually.

By investing the money that we have today, in one year time, it will be worth more than $100.

It would have earned 10% interest. Its value in one year after investing will be:

100×1.1=110

The new value after one year is $110. It is bigger than the $100 future value.

Please up vote. Thanks!