TIME VALUE OF MONEY.

We often find that the monetary consequences of any alternative occur over a substantial period of time-say, a year or more.Whenmonetary consequencesoccur in a short period of time, we simply add up the various sums of money and obtain a net result. But can we treat money this way when the time span is greater?

Which would you prefer, $100 cash today or the assurance of receiving $100 a year fromnow? You might decide you would prefer the $100now because that is one way to be certain of receiving it. But suppose you were convinced that you would receive the $100 one yearhence.Now what would be your answer? A little thought should convinceyou that it still would be more desirable to receive the $100 now.If you had the money now,rather than a year hence, you would have the use of it for an extra year.And if you had no current use for $100, you could let someone else use it.

Money is quite a valuable asset-so valuable that people are willing to pay to have money availablefor their use. Money can be rented in roughly the same way one rents an apartment, only with money,the charge is called interest instead of rent. The importance of interest is demonstratedby banks and savings institutions continuously offering to pay for the use of people's money,to pay interest.

If the current interest rate is 9% per year, and you put $100 into the bank for one year, how much will you receive back at the end of the year? You will receive your original $100 together with $9 interest, for a total of $109. This example demonstrates the time preference for money: we would rather have $100 today than the assured promise of $100 one year hence; but wemightwell consider leaving the $100 in a bank if we knewitwould be worth $109 one year hence.This is because there is a time value ofmoney in the form of the willingness of banks, businesses, and people to pay interest for the use of various sums.