The time value of money

Let's talk about the time value of money. Would you prefer to receive $100 today or $100 one year from now? What's your preference? I think all of us would prefer to receive $100 today. If the interest rate is, for example, 10 percent, receiving $100 a day is the same as receiving $110 a year from now. In other words, if I invest that $100 today at 10 percent, a year from now, it will be worth $110. So will I take $100 today or $100 a year from now? I'll take $100 today. What about taking $100 today or $110 a year from now? Well, now we are recognizing that there is a time value to money. With a 10 percent interest rate, receiving $110 one year from now is the same as receiving $100 today. This is called discounting. $100 today is the equivalent of $110 one year from now, if the interest rate is 10 percent. Discounting is the process of explicitly and mathematically using the time value of money to make long-term investment decisions. We discount all of the cash flows to the present…