Money is worth more in the present than in the future because there’s an opportunity cost to waiting for it. In addition to your loss of use if you don’t get your hands on it right away, there’s also inflation gradually eroding its value and purchasing power. If you’re going to part with your money for any period of time, you probably expect a larger sum returned to you than you started with. Whether you’re lending or investing, the goal is to make a gain to compensate you for going without your money for a while. Suppose your friend offers to repay you ₦2000 today or ₦2050 next year.
You must consider whether you’d earn more than ₦50 over the next year by investing your money elsewhere before choosing to delay receiving payment. Other factors include your time preference (whether you need the money right now or can wait awhile to get it back) and whether you trust your friend to actually repay you — another reason why money is worth more in the present: it may never materialize in the future. As the saying goes, “a bird in the hand is worth two in the bush.”
Suppose you have the option of receiving ₦100 Naira today vs. ₦200 in five years. Which option would you choose? How would you determine which is the better deal? Some of us would rather have less money today vs. wait for more money tomorrow. However, sometimes it pays to wait. This course introduces the concept of time value of money and explains how to determine the value of money today vs. tomorrow by using finance tools to determine present and future values. Also, this course exposes the concept of interest rates and how to apply them when multiple periods are considered.
Completing this course should take you approximately 8 hours. Upon successful completion of this unit, you will be able to:
- Explain the time value of money;
- Compute present values and future values;
- Compute rates of return and know their use in making financial decisions;
- Explain when to apply a simple interest calculation versus a compound interest; and
- Calculate the future value and present value of an amount using one period and multiple periods.