Search the Internet for a short article related to this weeks' topic - the time value...

Search the Internet for a short article related to this weeks' topic - the time value of money.

IMPORTANT NOTE - for this discussion please do not use articles/data from Wikipedia, Investopedia, The Street, Corporate Finance Institute, The Balance or Money Matters. Please find an article from a financial source such as Fortune, MSN, etc.

Once you find an article that interests you, discuss what you've learned or what your thoughts are. And please also post a link to the article so others can access it.

Expert Solution

Time Value of Money

If some one asks that they will pay 100 $ today or 100 $ after one year. What choice will you make? We will make the first choice because if we recieve the 100$ today we can deposit in a bank for say 3% interest rate and my cash at the end of 1 year is $ 103. We will be indifferent if the offer is 100 $ today or 103$ after one year.

Coming to the technicalaties

1) $ 100 recieved today is not equal to $ 100 recieved in future. Due to the following reasons

i) Risk

ii) Inflation

2) Todays money has more value than money recieved in future. This is referred to as time value of money

3) It is represented as percentage of. This percentage has two components

i) Inflation Rate

ii) Risk Premium

4) It is wrong to add cash flows received at different at different points of time because they have different vales due to time value of money.

5) We should bring all the cash flows to a common time frame and then add. If it is brought to today terms, it is referred to as present value or discounted cash flow. If it is taken to a future date it is called future vale of compounded cash flow..

jeff jeffy answered 2 years ago

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