![]() ![]() In contrast, a dollar received in the future can not begin earning interest until it is received. Opportunity cost – a dollar received today can be invested now to earn interest, resulting in a higher value in the future. Put another way, just think back to what $100,000 could buy you 100 years ago. Higher Purchasing Power – Because of inflation, $100,000 can be exchanged for more goods and services today than $100,000 in 100 years. No Risk – There is no risk with getting money back that you already have today. Which option would you rather take? Clearly the first option is more valuable for the following reasons: Suppose you were given the choice between receiving $100,000 today or $100,000 in 100 years. What does the time value of money mean? The intuition behind the time value of money is easy to see with a simple example. The time value of money is defined as the economic principle that a dollar received today has greater value than a dollar received in the future. In this article we take a deep dive into the time value of money, discuss the intuition behind the calculations, and we’ll also clear up several misconceptions along the way. And yet, many finance and commercial real estate professionals still lack a solid working knowledge of time value of money concepts and they consistently make the same common mistakes. It’s a fundamental building block that the entire field of finance is built upon. The time value of money is impossible to ignore when dealing with loans, investment analysis, capital budgeting, and many other financial decisions. Being completely comfortable with the time value of money is critical when working in the field of finance and commercial real estate.
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