Question

“discuss time value of money” 150 words or more

Answer 1

Time value of Money:

It says that money is carrying a value with time or time and value of money are inversely proportional. The value which is now will be different in the future due to many factors. Some of them are Inflation and opportunity cost. Inflation increases over a period of time due to high consumption by the consumers. So the money worth today will be less than in the future. The opportunity cost is the best alternative forgone by the individual. Suppose you invest a $100 invested today earns an interest and result in good value in the future.

The time value money is done using two methods

1. Compounding

2. Discounting

Compounding means a growth and discounting is done to the future value received in future by the opportunity cost or discount factor.

Examples of compounding: Money deposited in savings account

Examples of Discounting: Equated monthly instalments (EMI)

Applications of TVM:

1. Capital budgeting

2. Bond valuation

3. Stock valuation

4. Loan amortization