Time value of money

Q:

What does the time value of money refer to? — J.A., Clinton, N.Y.

A:

It’s a concept from the business world that assumes that a dollar today has more value than a dollar in the future. That’s partly due to inflation eroding purchasing power over time, and partly because investing today’s dollar can make it worth more in the future. (Test the concept for yourself: Would you rather receive a dollar today or a dollar in five years?)

Stock analysts and business school students incorporate the time value of money when performing complicated discounted cash flow (DCF) analyses to arrive at an estimate of the intrinsic value of a company or stock. (There are also simpler ways to estimate a company’s value, using metrics such as a price-to-earnings (P/E) or price-to-sales ratio.)

A DCF analysis features estimates of how much cash a company will produce over time, with future earnings discounted at a “discount rate” that’s essentially the rate of return investors would expect.

Q:

I’m thinking of relocating in retirement. Where can I look up the cost of living in various cities? — C.L., Phoenix

A:

Try clicking over to Numbeo.com/cost-of-living — it provides the cost of living in many cities and countries. It offers some detailed category breakdowns, and you can compare locations. For example, it recently showed Atlanta with rent prices and grocery prices 12.6 percent and 7.8 percent lower, respectively, than those in Denver.

A little searching online can turn up more cost-of-living calculators — some including health care data, which is important for many people, especially those in or near retirement. Mymove.com/cost-of-living provides specific examples of health care costs for cities in the United States.