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2.08 Time Value of Money

Time value of money is the concept $1 today is worth more than $1 tomorrow. Think about the price of a McDonald’s Big Mac:

1962 Price: $0.49

2018 Price: $4.79!

Given this, it is important to always remember when thinking about financial models and financial decision we need to adjust future cash flows so we are looking at it in today’s dollars.

A quick example:

if you have $1,000 today and you invest it in some high-yield online savings account that pays 10%, you will earn $10 of interest in year 1. So one year in the future you will have $110.

The way we make adjustments for time value of Money in financial modeling is through a Discounted Cash Flow Model, or DCF.

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