Question

1. What is the time value of money and why is it so important in finance?
   
2. If you won the lottery for $10 million and you had the choice to take a lump sum or payments over 20 years,

   a. which option would you choose? Why?

   b. What questions do you need answered before you decide?

   c. What situations may change your decision?

3. Banks and other lenders are required to disclose a rate called the APR.
   a. What is this rate?
   b. Why did Congress require that it be disclosed?
   c. Is it the same as the effective annual rate?
   d. If you were comparing loans could you use their APRs to determine the loan with the lowest effective interest rate?

Answer 1

Q - What is the time value of money and why is it so important in finance?

Answer - The Time Value of Money is the concept that money is worth more today that it is in the future. It is important in finance because we cannot simply add the cash flows directly , all the calculations are done in finance by taking the time value of money , using an appropriate interest rate.

a) I would choose the first one because the amount today which we have received can be invested further to gain some extra return.

b) If the rate of interest in the economy is less than 0 like in counties like Japan , then it will be of no sense to take the full money today , because the time values of money will reduce the future value of money in future.

c) The interest rate in the economy.