Question

G.   “£1 received today has the same value as £1 received tomorrow”. Discuss this statement and its implications for rates of return required by investors.

Answer 1

The statement is wrong as value of money does not remain same. Time value of money is based on the idea that the present worth of same amount of money will be more than the future worth of same amount if money. Interest rate is always positive so discounting reduces the value of money in future. This is based on the principle that investors prefer to receive amount sooner and if the amount is received later they would want higher returns on that amount. If the amount is received in future investors would want to receive higher amount in future due to the risk undertaken by the investor .

Since Rate of Return of money in future is always positive hence PV of dollar will be higher than FV of 1 dollar. Required rate is needed to cover for real interest, inflation ,etc.