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Discussing the Time Value of Money

Discuss: What is present value? What is future value? Would you rather have one dollar today or two dollars a year from now? Why?

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The time preference for money is an individual's preference for possession of a given amount of money now, rather than the same amount at some future time.
Three reasons may be attributed to the individual's time preference for money:
- risk
- preference for consumption
- investment opportunities

The two most common methods of adjusting cash flows for the time value of money:
1. Compounding: The process of calculating future values of cash flows and
2. Discounting: The process of calculating present values of cash flows.

(Book IM Pandey)
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

Simple interest is the interest on the principle amount while compound interest is when your principle and any earned interest earned interest. The interest rate is applied to the original principle and any accumulated interest.
Compound interest is critical to investment growth. With simple interest, interest is paid ...

Solution Summary

In about 680 words, including two references, this solution provides a detailed discussion on the concept of the time value of money. Sample calculations are given to help strengthen the points being made, along with reasoning for an individual's preference for money and its relation to the time value of money concept.