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The time value of money is important since money has opportunity cost associated with it. As an example, if an individual has $1 today, this amount can be invested at the prevailing interest rate and the value would be more than $1 after 1 year. If the interest rate is 10% for example, the value of $1 today would be $1 * (1 + 10%) = $1.10 after 1 year. The interest rate is always more than 0 and this creates opportunity cost in terms of interest accrued on the present value. As such, to measure the financial value, it is important to estimate the cash flows along with their timing so that the present value of the cash flows can be found and appropriate financial decisions can be taken. When the Net present value (NPV) of projects are computed, all the expected cash flows are determined and their present value is obtained by discounting using the...
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