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Personal Financial Planning, Fourth Edition by Wai Mun Fong, Benedict Koh

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3. Time Value of Money

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Introduction

The concept of time value of money is extremely important in personal finance. The time value of money is the simple idea that a dollar received today is worth more than a dollar received a year later. This is because the dollar received today can be invested at the prevailing market interest rate of r% to yield $[l + (r/100)] next year. If we generalise this idea further, it implies that money received in the future is less valuable than the same amount received today. This implies that it is necessary to discount money that we will be receiving in the future.

The concept of time value of money has numerous ...

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