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What do we mean by Time Value Of Money? |
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In simple terms, a dollar in hand TODAY is worth more than when you supposed to received say ONE YEAR from today.
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Is it important to understand this Time Value Of Money concept? |
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It is definitely important to understand especially when an entity start investing in projects that involves paying cash outflow up-front and only receiving cash inflows after a certain period of years. Those cash inflows supposed to receive after a few years later are not the same as being received upfront.
By understanding this concept, we can then later on learn to use a certain discount factor to relate these inflows supposed to receive in future years back to the up-front capital outflow.
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Time Value Of Money concept generally applied to : |
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Capital Investment Appraisals |
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Risk Versus Return Scenario as risk is associated with the time |
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Concept is used in Insurance and time related products |