Chapter 6-1 Discussion

Chapter 6-1 Discussion - What is "Time Value of Money"? The...

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What is "Time Value of Money"? The time value of money is an idea that money accessible at the present time is worth more than the same amount in the future due to its potential earning capacity. Furthermore, it can also be said that the money deposited in a savings account will earn interest. Because of this universal fact, we would prefer to receive money today rather than the same amount in the future. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Also referred to as "present discounted value". For example, assuming a 5% interest rate, \$100 invested today will be worth \$105 in one year (\$100 multiplied by 1.05). Conversely, \$100 received one year from now is only worth \$95.24 today (\$100 divided by 1.05), assuming a 5% interest rate. What is Interest? Please compare the two form of interest - Simple and compound? Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money, or, money earned by deposited funds. The interest is calculated upon the value of the assets in the same manner as upon money. Interest can be thought of as "rent of money". For example, if you want to borrow money from the bank, there is a certain rate you have to pay according to how

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This note was uploaded on 12/13/2009 for the course ACCOUNTING ACC 100 A taught by Professor A during the Fall '09 term at University of Phoenix.

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Chapter 6-1 Discussion - What is "Time Value of Money"? The...

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