Question

Provide two (2) reasons why an investor would prefer investments that offer returns earlier than later.        

Answer 1

The 2 reasons would be:

1. TIME VALUE OF MONEY

Because time value of money is high. The value of money today won't be the same in the future. The sooner you get the return, the greater the potential you have to re-invest and increase your wealth. One of the reasons why investors demand a higher return for long term investments.  

2. RISK OF UNCERTAINITY AND INFLATION

The certainity of getting returns from the particular investment increases, if the returns are received sooner. One of the reasons why investors demand risk premium if the cash flows are received late.

Also, there lies a risk of inflation  if the inflation rises than what was anticipated the cash received in future would be worth less than what it would have been. The risk of losing purchasing power.

All the above mentioned reasons also increase the NPV of a projects if the features above mentioned are present compared to a project with same maturity and initial investment but absent of the features above.

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