Question 2 OR (a)

A rupee today is not equal to a rupee tomorrow

4 marks

Time to write
About 8 minutes

From an older CBCS paper

Question

Question 2 OR (a) · 4 marks

Explain: "A rupee today is not equal to a rupee tomorrow." 4

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

  • ExplainTie the answer to the quoted statement: say what it means first, and come back to it at the end.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Meaning: time value of money 1½ marks 3 min
  3. 2 Reasons 1½ marks 2 min
  4. 3 Implication 1 mark 2 min

Easy marks

  • Step 1 opens with the meaning: a one-line definition, the quickest mark in it.

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks. End with step 3 in a line or two.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

The statement means that money has a time value: a sum received now is worth more than the same sum received later. ₹1,000 in hand now is more valuable than ₹1,000 receivable after a year; we would part with ₹1,000 now only for a promise of something more than ₹1,000 later, and that extra compensation is interest, the time value of money. Assuming that a rupee now equals a rupee at the end of year 1, year 2 and so on is incorrect.

Reasons

  1. Preference for present consumption over future consumption.
  2. Investment opportunity: a rupee now can be invested to earn a return, an opportunity lost if it comes later.
  3. Uncertainty: the future is uncertain, the most important reason; a rupee in hand is certain.
  4. Inflation: rising prices reduce the purchasing power of a future rupee.

Implication. Rupees of different dates cannot simply be added. They are made comparable by compounding them to a common future date or discounting them to the present, which is the basis of the discounted cash flow methods (NPV, IRR) used in financial decisions.

Where the 4 marks sit

#ComponentMarks
1Meaning: time value of money1.5
2Reasons1.5
3Implication1
Total4
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