Why is a dollar today worth more than a dollar tomorrow? If you had $1000 to inv

Question

Why is a dollar today worth more than a dollar tomorrow?

If you had $1000 to invest and had to choose between a bank that paid 5% simple interest and one that paid 5% interest compounded monthly, in which would you deposit your money? Explain your response and be sure to explain the difference between simple and compound interest in your response.

When creating a timeline to visually represent cash flows, why are cash inflows represented by positive numbers and cash outflows represented by negative numbers? In your response, be sure to clearly define cash inflows and cash outflows.

Explain why the interest earned on a deposit is equal to the difference between the future value and the present value. In your response be sure to clearly define future and present value.

Explain how the compounding period for a deposit in a bank may be different from the number of years that a deposit is left in a bank. In your response be sure to clearly define compounding period and state what m (from eq. 3.5) represents.

There are five time value of money components – FV, PV, N, I, and PMT. Briefly describe each and create a hypothetical and realistic calculation word problem to find one of the components.

Explanation / Answer

a dollar today is worth more than a dollar tomorrow because of inflation and positive interest rates. due to inflation the amount of stuff you can buy for 1 dollar is going to decrease. this case is not going to be true if you have negative inflation and negative interest rates(Japan is the only country that had negative interest rates)

Compounded interest rates are better for investment as after the first time period the interest rates will be applied to new increased principle value which will increase the output. an example in a simple rate we calculate interest on the starting principle value (1000) but in the compound interest rate you calculate interest on the balance in an account after 1st month the interest will be calculated on (1000*1.05=1050) which will be greater

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