Nadia is going to receive $1,000 from her grandparents next year. According to the time value of money, the gift of $1,000 is worth __________ a gift of $1,000 if she received it today.
less than
The value of money changes over time due to inflation and other factors. This principle is called the time value of money. It means that money received in the future is worth less than the same amount of money received today.
To calculate the present value of the gift of $1,000, we need to use a formula that takes into account the interest rate and the time period. Let’s assume an annual interest rate of 5%.
The present value of $1,000 a year from now can be calculated as follows:
PV = FV / (1 + r)n
where PV is the present value, FV is the future value, r is the interest rate, and n is the time in years.
Applying this formula, we get:
PV = $1,000 / (1 + 0.05)1
PV = $952.38
Therefore, the gift of $1,000 that Nadia will receive next year is worth $952.38 today, due to the time value of money.
More Answers:
Understanding the Net Profit Margin Ratio: How to Measure Your Company’s ProfitabilityMaximizing Net Profit: A Guide to Understanding and Calculating Bottom Line Revenue
How Net Loss Affects a Company’s Financial Health: Causes and Strategies to Mitigate