The Time Value Of Money Is
The time value of money is certainly not a new concept. The definition of the time value of money indicates that “money received sooner rather later allows one to use the funds for investment or consumption purposes”. The value money at the present time is worth more than the same amount in the future due to its potential earning capacity, $1 today is worth more than $1 in the future because reasons:
Inflation makes decline in the purchasing power of money
Risk in the economic activities
Money at the present can make interest by itself but money in the future still only the same value. We can put money to work earning more money for us (earning interest, invested in stocks, real estate or other assets that can appreciate in value).
The fact shows that the monetary has a time value and the interest rate is a measure of time value of money
For example, if we were given $100 today and invested it at an annual rate of 1% it could be worth $101 at the end of one year, which is more than you'd have if you received $100 at that point. We can look at the sentence “a bid in the hand is worth two or more in the bush" to understand the time value of money. A bid in the hand is the money that we hold today, birds in the bush is the cash we will receive from our investment in the future we can earn interest on money received today, it is better to receive money earlier rather than later.
Payback period is part of capital budgeting approach which ignores the concept of time value of money
b.
Inflation makes decline in the purchasing power of money
Risk in the economic activities
Money at the present can make interest by itself but money in the future still only the same value. We can put money to work earning more money for us (earning interest, invested in stocks, real estate or other assets that can appreciate in value).
The fact shows that the monetary has a time value and the interest rate is a measure of time value of money
For example, if we were given $100 today and invested it at an annual rate of 1% it could be worth $101 at the end of one year, which is more than you'd have if you received $100 at that point. We can look at the sentence “a bid in the hand is worth two or more in the bush" to understand the time value of money. A bid in the hand is the money that we hold today, birds in the bush is the cash we will receive from our investment in the future we can earn interest on money received today, it is better to receive money earlier rather than later.
Payback period is part of capital budgeting approach which ignores the concept of time value of money
b.