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Time Value of Money.docx

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COMM 101
Tamar Milne

Time Value of Money - $1000 today does not have the same value as $1000 in one way - interest, inflation, opportunity cost, purchasing power - What is opportunity cost? - cost of the next best option - lost value of next best alternative What does it have to do with the time value of money? - if we’re making a decision involving future cash flows, we want to make sure that we are putting our money to the best possible use - how much we value the thing - when faced with multiple decisions, we need to have a quantitative method of determining which decision is best Discounting cash flows - do we take the value now? And let it grow OR - do we take in divisions over a period of time - We need to compare decisions in terms of present-day dollars (Net Present Value) - Net Present Value: brings the amount to today, determine how much they are worth in todays dollars Example: The risk free rate is 10%, you have 2 possible investments - an investment that costs $1000 and pays $1090 in one year - an investment that costs $1000 and pays $1210 in two years - the first one: we get
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