Explain what is the time value of money. (minimum 150 words)

Expert Solution

Time value of money is the analysis to determine the worth of money in future or present terms. Money flow that will be received or paid in the future is analyzed for the present value of the money today. Similarly, the future value of the present sum of money is determined through this concept. The fundamental assumption of this model is that the present value of money is more than its future value i.e. the value of money depreciates with time. The sooner the money is received, the more the worth of money. The value of $1 dollar today may value less than $1 in the future. To determine the future or present value an appropriate discount rate is used to discount the cash flows which is usually the opportunity cost of the funds. Time value of money has various applications in real life i.e. for determining annuities, installments, interest payments etc. Time value of money is also related to the concept of inflation and purchasing power , used for investment decisions by companies.

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