Introduction
Throughout this book, we have mentioned the time value of money, that money today is of more value than money tomorrow. This is due to the following reasons:
- Depreciation – Prices always go up, so the spending power of 1 Naira today is greater than the spending power of 1 Naira tomorrow.
- The ability to invest, so with interest, your money grows over time. 1 Naira today = 1 Naira + interest tomorrow.
This brings us to the concepts of Present Value (PV), Future Value (FV), and opportunity cost or discount rate. The PV is today's value and FV is the value at some time in the future.
When you choose a particular line of action, the benefit you would have derived from other alternatives that you did not choose is referred to as the opportunity cost. The opportunity cost is the same as the discount rate and this rate is what is used to convert FV to PV and vice versa.
