Question

why is it important to know that most people would rather have $90 today than $100 next year and why?

Answer 1

It is impotant to know why people prefer 90 dollars today than 100 dollars next year. If people are doing that then definetly they have the knowledge of time value of money.

TIME VALUE OF MONEY(TVM) : It means money will be same as note before, but the value of it changes from time to time because of economic conditions of a country.

Under this it is said that worth of money now is more than the sum we receive in future. TVM can also be sometimes called as Present Value of Cahsflows.

Every rational investor would like to recieve money rather than in future because of growth in money value over a period of time.

I can give an example suppose i invest 100$ in a saving account which earns an interest of 6% per anum. At the end of the year i will get 100 + (100*6%) = 106 dollars.

If i have given a choice of getting 100 now and 100 in next year, then i would definetly choose to take 100 dollars.

The return might be increased if i have invested in shares or some other Instruments.

EXCEPTIONS:

Even though it is expected that value of money increases in near future, there is one exception to it that is INTEREST RATES GOING NEGATIVE which is now in developed countries.