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Chapter 4: Q3DQ (page 279)

Why does money have a time value?

Short Answer

Expert verified

The money possesses a time value because of its interest-earning capacity. This is why the opportunity cost of money also increases with time.

Step by step solution

01

Meaning of time value of money

The time value of money states that the dollar amount received today is worth more than a similar dollar amount received in the future.

02

Reason for money having time value

The money has the quality of fetching real return as well as the compensation for inflation prevailing in an economy. This is why the value of money increases with the passage of time. The return so generated by money are called as the time value. For instance, an investment of $1,000 providing $150 after an year indicates a time value of $150 that consists of cost of using the money, compensation for various risks such as inflation risk, etc.

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Most popular questions from this chapter

Your father offers you a choice of \(105,000 in 12 years or \)47,000 today. a. If money is discounted at 8 percent, which should you choose?

Your aunt offers you a choice of \(20,100 in 20 years or \)870 today. If money is discounted at 17 percent, which should you choose?

Question: Sherwin Williams will receive \(18,500 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights now for \)165,000?

Question:Justin Cement Company has had the following pattern of earnings per share over the last five years:

Year Earnings per Share

20X1 ................... $5.00

20X2 ................... 5.30

20X3 ................... 5.62

20X4 ................... 5.96

20X5 ................... 6.32

The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings.

Project earnings and dividends for the next year (20X6).

If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 20X6?

You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
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