August 2011
Beginner
547 pages
16h 12m
English
Content preview from Fundamentals of Financial Management, Third EditionBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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2.1 THE CONCEPT
The concept of time value of money deals with the fact that an amount of money received in the future is not as valuable as the same amount of money received in the present. This is because:
- The future is uncertain;
- Individuals prefer current to future consumption;
- The opportunity exists to invest the amount received in the present at a specific rate of interest;
- Inflationary trends are a common feature reducing the value of money in the future.
All this means that future benefits should include some compensation for waiting. In other words, the future benefits should be equal to the sum of the present benefits and an amount equivalent to the compensation for waiting. Suppose a person gets 5% per annum as interest on a savings ...
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