Question

Why is there a time value of money (cash received today is valued more than cash received a year fromnow)?a. Interest rates are greater than zero.b. Inflation.c. Consumption needs.d. risk.e. a and b are correct.f. c and d are correct.

Answer 1

A and B are correct

Explanation :

• The TVM concept is based on the value of money which is today may change with time as a rise or fall in prices thus this explains why the interest rates are paid and calculated on the basis of the present values that may change such as future sum of money of cash flows, can get discontinued at the discounted rates.

• Future values can be ascertained based on the present value of the product/assert. Thus the interest rates and inflation rates change as the risks and the consumer's needs will always be present and have existed earlier.

• It's calculated by the present value and future value of money multiplied by the interest rate and the total number of years. I.e

• FV = PV x [ 1 + (i / n) ] (n x t)