In: Finance

In finance, what do we mean by the time value of money? How do we calculate it?

Step 1

- The Time value of money is a concept that says the amount of money has more worth in the present time than in the future with the same amount of money due to its potential earning capacity.
- Money loses its value because of inflation, which reduces the buying power of money.
- Suppose today you are having $100, its present value is also $100 but its future value will be $97.56 discounted at an inflation rate of @2.5%.
- For this reason, the future value is worth less than the present value.

Step 2

Following are the formulas for future value and present value:

- Future value=PV(1+r)nPV = present valuer = interest raten = years
- Present value = FV(1+r)nFV=future value, r = interest rate, n=years

The Time value of money is a concept that says the amount of money has more worth in the present time than in the future with the same amount of money due to its potential earning capacity.

Latest Questions