PRINCIPLES OF VALUATION Because rational people prefer to receive benefits sooner than later and make sacrifices later thansooner, money, which provides the option to buy benefits, is likewise preferred sooner to later.If an individual prefers money sooner than later, then he/she values a dollar today more than adollar tomorrow or a dollar in one year from now. A dollar today is worth a dollar today:therefore, a dollar next year must be worth less than a dollar today since it is less preferable/valuable. In other words, the same amount of money will be more or less valuable depending upon when itis received. What would you prefer, $100 today or $100 in
one year from today? Most people prefer $100 today since
it gives them the option to spend it today or save it and spend it in oneyear. Receiving $100 in one year doesn't allow for $100 in consumption today.For equal amounts of money, the decision when to take money --today or in the future-- is aneasy one: sooner is always better than later. But what about situations where the amounts differ?What decision rule should be used in those situations?For example, what is preferable? $100 today or $133.1 in three years? Simply picking the largestnumber may not provide the best value. (Another way of viewing this situation is to ask: wouldyou pay $100 today to receive $133.1 in three years?) The answer depends upon what could beearned with the $100 in alternative investments. Suppose that it's possible to earn 5% on the$100. Then after three years it would accrue to $115.76. In that case, it would be better to waitand take the $133.1. If 15% could be earned, the $100 today would grow to $152.08 and the$100 today would be more attractive.