Time Value Of Money

Time Value Of Money

Time value money is a fundamental concept in finance, It states that the value of money changes over the time due to factors such as interest, Inflation and opportunity cost. Time value of money principle states that receiving money today is generally more valuable than receiving the same amount of money in future.


A person having the money in hand can invest it for better returns in future. On the other hand the same amount receive a year after, it loses its value. 

There are the two main aspect of time value of money:-                                               

Future Value (FV):- Its refers to the value of investment or cash flow at a specific point in the future,

Given a certain rate of interest. It is calculating by applying compound interest to the present value of money.

Example:- Let’s say you have $1000 that you want to invest in a saving account that offers an annual interest rate of 5%.  Calculate the Future Value of your investment After 5 Years.

To Calculate the future value, Use the formula:- Future Value = PV*(1+i) ^n                                                         

Future Value = $1000*(1+0.05) ^5

Future Value = $1276.28

Therefore the future value of your $1000 investment after 5 years at a 5% annual interest rate would be $1276.28.

 Present Value(PV) :- Present value refers to the current value of future cash flow.     

Present Value Formula:-     Future Value /(1+r)^n

Example:- Let say have the opportunity to invest in a project that promises to pa        $10000 in three years. Determine the Present value of this future cash flow to assess its current worth , considering discounting rate 8% per year.

Solution:- Present Value = $10000/(1+0.08)^3,                                   PV = $7942.52

Therefore the PV of receiving $10000 in the three years with discount rate of 8% per annum is approximately $7942.52. It means current value of the future cash flow is equivalent to $7942.52, While considering the time value of money and given discount rate. 

FAQ About the Time Value Of Money:-                                                                          

     Q1:-What is the Time Value Of Money.                                                                                                  

    Ans:- It is a financial concept that recognized the idea that the value of money change over the time.

    Q2:- Why is the time value of money important.                                                                                     

 Ans:- It helps in making financial decision by comparing the value of money at different points of time.

   Q3:- What are the key component of the time value of money.                                                              

 Ans:- The key component of the time value of money are the Present value, Future Value, Interest Rate, and the time period involved.

Q4:- What is the formula for calculating Present value and Future value.                                         

Ans:- Present Value = Future value/(1+interest rate)Number of periods.                                         

            Future Value =  Present value*(1+Interest Rate)^Number of Periods.                                   

 Q5:-Can the time value of money be used for both personal and business financial decisions.           

   Ans:- Yes Because it helps individuals make informed choices about saving, investing, and borrowing money. 


 


    






Location: Palwal, Haryana 121102, India

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