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Value of money - Chapter 14W p 14W2-14W8(find it on the web...

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53 Chapter 14W, p. 14W2-14W8 (find it on the web at http://highered.mcgraw-hill.com/sites/0073273082/student_view0/web_chapters.html Time Value of Money Introduction: Suppose your brother or sister owed you $500. Would you rather have this money repaid to you right away, in one payment, or spread out over a year in four installment payments? Would it make a difference either way? According to a concept that economists call the time value of money, you would probably be better off getting your money right away, in one payment. You could invest this money and earn interest on it or you could use this money to pay off an all or part of a loan. There are a million things you could do with this money. The time value of money refers to the fact that a dollar in hand today is worth more than a dollar promised at some future time. But how can that be? A dollar is a dollar, isn't it? Yes, but a dollar in hand today can be invested in an interest-bearing account that would grow in value over time. This explains in part why the value of money is related to time. The 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
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