From the course: Corporate Finance Foundations
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The importance of the time value of money
From the course: Corporate Finance Foundations
The importance of the time value of money
- So, let's talk about the time value of money. Would you prefer to receive $100 today or $100 from one year from now? What's your preference? Well, I think all of us would prefer to receive $100 today. If the interest rate is, for example, 10%, receiving $100 today is the same as receiving $110 a year from now. In other words, if I invest that $100 today at 10%, a year from now, it'll be worth $110. So, would I take $100 today or $100 a year from now? Well, I'll take $100 today. What about taking $100 today or $110 a year from now? Now, we're recognizing that there is a time value to money. With a 10% interest rate, receiving $110 one year from now is the same as receiving $100 today. That's called discounting. Discounting is the process of explicitly and mathematically using the time value of money to make long-term investment decisions. In capital budgeting, we discount all of the cash flows to the present time…
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