Question

Discuss the concept of time value of money (TVM) and why it is important in finance?

Answer 1

                             Time value of money also TVM is one of the most important concept in finance, because anything connected to finance is based on TVM. The concept of time value of money can be understood with the following principles of time value.

• A rupee received today is greater than a rupee received tomorrow ,because money has a time value. example: $100 today is not equal to $100 a year later
• The time value of money is a compensation for postponement of consuming the money.
• The time value of money can be derived = adding up the factors namely,
  • The expected inflation rate for the period
  • the real risk free investment rate
  • risk premium - if the risk of getting the $100 a year later determines the risk premium.
• The time value of money can also be derived from the expected rate of return from a comparable investment option.
• Also Time value of money is different for different person ,because every person have their own desired compensation for postponing the use of money.
• Time value of money is different for same person ,because same person have different compensation requirements for different investments
• It is used as a discounting factor for determining the present value for future cash flows.