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Unformatted text preview: e time value of money is related to another concept called opportunity cost. The cost of
any decision includes the cost of the best-forgone opportunity. If you pay $10.00 for a
movie ticket, your cost of attending the movie is not just the ticket price, but also the time
and cost of what else you might have enjoyed doing instead of the movie. Applying this
concept to the $500 owed to you, you see that getting the money in installments will
saddle you with opportunity cost. By taking the money over time, you lose the interest on
your investment or any other use for the initial $500, such as spending it on something
you would have enjoyed more. The trade-off between money now and money later
depends on, among other things, the rate of interest you can earn by investing.
First, consider future value.
Future value (FV) refers to the amount of money to which an investment will grow over a
finite period of time at a given interest rate. Put another way, future value is the cash value of
an investment at a particular time in the future. Sta...
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- Fall '10