paraphrasing 149

paraphrasing: Changing the sentence format and syntax, as well as changing the order of sentences, not just changing vocabulary

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Q2. Briefly discuss the Time Value of Money concept?

Ans:

  • Price/value today of cash flows (whether the cash flow is a payment to be made or income to be received) that occur in the future is determined by the time value of money (TVM)
  • TVM is based on belief that people prefer to consume goods today rather than wait to consume the same goods tomorrow
  • Dollar someone has today can be spent for consumption or loaned to earn interest
  • Dollar loaned earns interest that increases wealth and the ability to consume

  • Apple we can have today is more valuable to us than an apple we can have in one year.
  • Money has a time value because buying an apple today is more important than buying an apple in one year
  • The rate of interest determines the trade-off between consumption today and saving (investing)
  • Timelines are an effective way to visualize cash flows
  • Present cash outflows as negative values
  • Present cash inflows as positive values
  • Cash-flows are evaluated based on future value or present value
  • Future value measures what cash-flows are worth after a certain amount of time has passed
  • Present value measures what future cash-flows are worth before a certain amount of time has passed
  • Compounding is the process of increasing cash-flows to a future value
  • Discounting is the process of reducing future cash-flows to a present value
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