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The outcomes of most business decisions occur over an extended period of time, often several years. Thus, most decisions should be analyzed using the concept of time value of money. The time value of money is the general universal preference for “a dollar in hand today is worth more than the prospect of receiving a dollar on some future date”.

It is generally accepted that if you were offered a choice of two alternatives, a gift of $1,000 today or a gift of $1,000 on some future date, such as one year from now, you would elect to receive the $1,000 now. However, suppose that you were offered a choice of $1,000 now or $1,100 a year from now. This decision is not as clear-cut because you have been offered a $100 compensation to forego receiving the funds now. Is this sufficient compensation? This concept of determining if a certain amount of money is worth more or less than a larger amount of money in the future is called the Time Value of Money.

There are three basic reasons for analyzing the time value of money.


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Time Value of Money