The costs are paid and the benefits are received during different periods of the life of the system. Money can have different values at different times. This is because money can be used to earn more money between the different instances of time. Obviously, $10,000 now is worth more than $10,000 a year from now even if there is no inflation. This is because it can earn money during the interval. One could deposit the money in the bank and earn interest on it. This is the earning power of money over time and is called time value of money, that is, $10,000 now has more value than $10,000 six months from now.
Because the interest rate is the more identifiable and accepted measure of the earning power of money, it is usually accepted as the time value of money and indication of its earning power. We have to be careful not to confuse the earning power of money, which is related to interest rate, with the buying power of money, which is related to inflation. Inflation will be discussed later.
Was this article helpful?
What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.