Question

2 Factors that cause the current value to be less than future value are opportunity cost and risk/uncertainty?

Explain why with a real-life example

Answer 1

Factors that cause the current value to be less than future value are opportunity cost and risk/uncertainty?

The current value to be less than future value because time value of money. investor invest or deposit there money in different form to earn money in future so in that time investor missed other opportunity. opportunity cost is the profit of a company if the company invest its capital, equipment,real estate in a different way.

Example- A investor invest $1000 in security market, and after one year the investment has appreciated value is $1050. the return on investment in security is 5%. in that time investor have other option to deposit in bank account and for that bank will pay 6% interest so the net appreciation value is $1060 after one year. the opportunity cost to invest in security is $10 relative to the bank deposit. the investor decision to invest in security with 5% return at the cost of a lost opportunity to earn 6% return because return on security is uncertain.