To see why note that if you have 1 today you can

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Unformatted text preview: equivalent to money in one year. In general, a dollar today is worth more than a dollar in one year. To see why, note that if you have $1 today, you can invest it. For example, if you deposit it in a bank account paying 7% interest, you will have $1.07 at the end of one year. We call the difference in value between money today and money in the future the time value of money. We now develop the tools needed to value our $100,000 investment opportunity correctly. Today One Year $100,000 $105,000 $1.00 $1.07 The Interest Rate: Converting Cash Across Time interest rate The rate at which one currency can be borrowed or lent over a given period. interest rate factor One plus the interest rate, the rate of exchange between dollars today and dollars in the future. It has units of “$ in one year/$ today.” By depositing money into a savings account, we can convert money today into money in the future with no risk. Similarly, by borrowing money from the bank, we can exchange money in the future for money today. The rate at whi...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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