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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.”

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