Question

What is the “Time Value of Money” and why does money have a time value associated with it?

Answer 1

Time value of money is a concept according to which the worth of money available at present is more compared to the same sum of money anytime in future.
The equation for time value of money is:
Future value=Present value*(1+interest rate)^Time period
=>Present value=Future value/(1+interest rate)^Time period

Now, money have a time value associated with it because we can invest money to earn interest on it. Again, due to inflation (that reduces the purchasing power of money) and opportunity cost (losing investment opportunities) money looses its value overtime.

Example: Suppose we have $1000 today, and the interest rate is say 6%, then after 5 years,
Future value=1000*(1+6%)^5=$1338.23

It means that future value of $1338.23 (after 5 years) will be equivalent to $1000 at present time. So, if we invest the amount we will get $1338.23 in future.

What if we don't invest?

We will have the same sum of amount (that is $1000) after 5 years. Now, suppose we are 5 years ahead of present time with $1000 in hand, its present value will be:
Present value=1000/(1+6%)^5=$747.258

This means, what we can buy today with an amount of $747.258 in hand, we will get the same thing at a price of $1000 after 5 years. This is due to rise in prices of the things that we buy (this rise in price is called as inflation).

So, clearly money have a time value associated with it.