Let's start with a very simple example. Suppose someone borrowed $100 from you today and offered to pay the loan back in full one year from today. Is $100 one year from now equal to $100 now? Of course not, because you could put that $100 in a simple savings account or some other interest bearing investment and have somewhat more than $100 next year. So, while you might let a friend have an interest free loan, it's probably not the way you would do business in general, at least not for long.

How much is $100 received in one year worth today? The simple answer is that it's worth whatever amount of money we have to invest today to have $100 in a year. The answer to that depends on the interest rate at which you can invest.

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