Question

Why does money have a time value? Can you provide at least one real-life scenario in...

Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of time value of money?

Homework Answers

Answer #1

Money has a time value because the value of money today has more worth than the same amount of money. This is due to the opportunity cost involved and inflation involved . Hence the Present value of cash today will have higher value than future value of same amount.

Real life examples

An amount of 10000 is deposited in the bank today at rate of 10%
After 2 years the future value = Present Value *(1+rate)^n = 10000*(1+10%)^2 = 12100
After 2 years banks will pay 12100 for a PV of 10000. This is an application of time value of money.

Time value of money is also used to value stock price from dividend and also to calculate value of firm from free cash flow.

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