THE TIME VALUE OF MONEY
• Explain why a dollar today is worth more than a dollar in the future
• Define the terms future value and present value
• Calculate the future value of an amount and annuity
Is it better to receive $10,000 today or at the end of the year? The clear answer is today, for a variety of reasons:
• Certainty. A dollar in hand today is certain, whereas a dollar to be received sometime in the future is not.
• Inflation. During inflationary periods, a dollar will purchase less in the future than it will today. Thus, because of inflation, the value of the dollar in the future is worth less than it is today.
• Opportunity cost. A dollar today can be used or invested elsewhere. The interest forgone by not having ...