me value of money in relation to the rate of inflation. An annual inflation rate of five-percent means that for a stable product (no design changes, new production efficiencies, and so forth occur) one will need to pay $105 for a product that can be bought today for $100. For a company considering an investment, the time value of money also relates to risk. If the company can put $100,000 in highly secure government treasury bills and earn five-percent per year in interest, it will not commit that $100,000 to a riskier investment unless there is a good chance that the alternative investment will earn more than the nearly risk-free investment. Therefore, the company will discount the future earnings of the alternative investment by an appropriate interest rate factor to assess the riskier
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