Question

An investor into the real estate mentioned to you that he/she wishes to purchase a property for investment upon his/her graduation in about 3 years time. The property value he/she can afford are in the range of rm300,000. Evaluate the above in the perspective of time value of money.

Answer 1

Time value of money (TVM):

Money gets depreciated as the time goes on. This is the concept of TVM. Therefore, today’s affordability may not be adequate enough for tomorrow’s investment. Suppose money gets depreciated at the rate of 10%. Therefore, today’s affordability after 3 years would be as below:

Affordability after 3 years = Present affordability / (1 + rate) ^ year

                                             = 300,000 / (1 + 0.10) ^ 3

                                             = 300,000 / 1.10 ^ 3

                                             = 300,000 / 1.331

                                             = 225,394.44

The affordability gets reduced after 3 year; therefore, the property may not be purchased with this affordability.

Hence, it is better to have purchase now if the person has money.