Question

Explain the importance of Time Value of Money concept.

Detail about how the value of money changes in relation to time.

Also explain the change is purchasing power of the money in relation to time.

Answer 1

Time value of money is the value of money with the time. Changing purchasing power of money with the exclusion of time. In the period of inflation purchasing power of money is going down day by day. If we invest or deposit some money in the bank, then we receive return or interest on such money. Such return or interest is the compensation for the the loss of value of money for such length of period. It is true that money received today is more valuable than money received in future. It is vice versa in the environment of deflation. Thus changing value of money with the period of time in both the environment is known as Time value of money.

For Example:-

Let’s say you have $ 100 in you pocket today and you out it in a bank FD at 5% annual interest. So from a year from now, you shall receive Rs 105. So we can say that future value of Rs 100 is Rs 105. And another way to put is present value of Rs 105 is Rs 100.