I RECENTLY RECEIVED A NOTICE FROM A MAGAZINE REMINDING ME THAT MY SUBSCRIPTION WAS RUNNING OUT. It’s a relatively expensive weekly magazine, and they offered me three different plans to renew my subscription: one year (52 issues) for $130, two years for $220, or three years for $275. Table 17-1 summarizes these options and also shows the respective cost per issue.
Table 17-1. Pricing plans for a magazine subscription
Price per issue
Assuming that I want to continue the subscription, which of these three options makes the most sense? From Table 17-1, we can see that each issue of the magazine becomes cheaper as I commit myself to a longer subscription period, but is this a good deal? In fact, what does it mean for a proposal like this to be a “good deal”? Somehow, stomping up nearly three hundred dollars right now seems like a stretch, even if I remind myself that it saves me more than half the price on each issue.
This little story demonstrates the central topic of this chapter: the time value of money, which expresses the notion that a hundred dollars today are worth more than a hundred dollars a year from now. In this chapter, I shall introduce some standard concepts and calculational tools that are required whenever we need to make a choice between different investment decisions—whether they involve our own personal finances or the evaluation of business ...