Which of these would you choose? In order to solve this, you need to make everything into its present value in order to compare apples to apples.
Your uncle wants to give you an inheritance and gives you three options to choose from (a) You can have $8000 cash now
(b) You can receive payments of $1000 a year for 20 years
(c) You can have $50,000 in 20 years
interest rate is 13%
Which of these would you choose? In order to solve this, you need to make everything into its present value in order to compare apples to apples.
Time value of money considers the value of money in present is more worth than in future.
For example: If we have $1000 in hand now, we can invest this amount and this amount will increase in future due to interest factor. Due to Inflation, cost of money holding rises with increase in time. So it is better to consider time value of money while we are analyzing or comparing any future plans with different amount and intervals.
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