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Key MBA Models by Dr. Julian Birkinshaw, Ken Mark

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Time value of money

Would you prefer to be given a dollar today, or in one year’s time? Obviously you would prefer to be given it today, because you could then invest it, with interest, and a year from now it would be worth more. This is the simple intuition behind the time value of money, and it is a foundational concept in the world of finance.

When to use it

  • To make investment decisions as an individual investor.
  • To evaluate the return on a project.
  • To compare activities that take place at different points in time.

Origins

No one knows the true origins of the concept – it has been around as long as money has existed. R.H. Parker, in 1968, traced the earliest interest-rate tables back to 1340, but the informal understanding that money ...

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