Question

Search the Internet for any short article related to our topics this week of time value of money. For the purpose of the discussion, avoid sites such as Wikipedia or Investopedia. Once you find an article, discuss what you've learned or what your thoughts are. Please also post a link to the article so others can access it.

Answer 1

There are multiple reasons why money loses value over time on account of inflation reducing the purchasing power of money. Also there is the opportunity cost of not having the money right now due to loss of additional income earned by having received the amount at an earlier stage.

So, Time Value of Money attempts to incorporate the above facts into financial decisions by helping to do an objective evaluation of cash flows from different time periods by converting them into present value or future value equivalents. The present or future value of cash flows are calculated using a discount rate called the rate of return(r). The present value formula is calculated by discounting the cash flow by one plus the discount rate raised to the nth power and add the same for multiple cash flows at their discount rates.

PV = Σ CF/(1+ r)^n

Ref: accountingcourse