Interest Rates and the Time Value of Money
Time Value of Money
Imagine a simple investment opportunity with the following cash flows (which are certain to occur).
Cost: $1,000 today
Benefit: $1,030 in one year
Can we judge the opportunity as valuable by noting that $1,o3o > $1,000?
Money has two “units”
The difference in value between money today and money in the future is “the time value of money.”