Economics Time Value Of Money Questions
The inflation rate refers to the rate at which the general level of prices for goods and services is rising and, subsequently, the purchasing power of currency is falling. Inflation erodes the value of money over time, meaning that the same amount of money will be able to buy fewer goods and services in the future.
In terms of the time value of money, inflation has a significant impact. It reduces the purchasing power of future cash flows, making them worth less than the same amount of money in the present. This means that the future value of money decreases as the inflation rate increases. Consequently, when calculating the time value of money, it is crucial to consider the inflation rate to accurately assess the real value of future cash flows.