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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 $1.07 The Interest Rate: Converting Cash Across Time interest rate The rate at
which one currency can
be borrowed or lent over a
interest rate factor One
plus the interest rate, the
rate of exchange between
dollars today and dollars
in the future. It has units
of “$ 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.
- Spring '07