Question

The concept of Time Value Money is very important in investing. When you have money in your "hand" in todays world, it is worth more than it could be in the future. When you are investing, you have no idea what the future will hold or how much your dollar will be worth. Since money earns interest, it is worth more the earlier that you invest it and can get a return on your investment. In the Prudential commercials, they do a good job demonstrating simple concepts of investing to consumers and educate them on what investing means and how to do it. Financial literacy education is very important to consumers so that they can learn what investing is, how to do it, and how to earn the most from their investment.

A 100 response back to the above statement

Answer 1

Time value of money (TVM) means that worth of a dollar recieved today is different from the worth of a dollar to be received in future.it is one of the basic concepts of finance,The preference for money now as compared to future money is known as time preference of money. reasons for time preference of money    1)risk factor there are financial and non financial risks involved over time.further there is uncertainty about receipt of money in future because the longer the time period of returns the greater is the risk,hence present money is preferred. 2)preference for present consumption most of individuals /companies prefer present consumption than future consumption ex consumer durables. 3)inflation factor because inflation erodes the value of money,in inflationary situations a dollar today represents a greater purchasing power than a dollar one year later.ex if present price of petrol is $50 per liter,20 litres of petrol can be purchased with $1000 in hand now.if the price of petrol goes up to $65 per liter in a year's time,only 15.38 litres of petrol can be purchased with $ 1000 in hand at that time. 4)Investment opportunities present money is also preferred due to availability of investment opportunities for earning additional cash flows ex $100000 is available in hand now earns interest at the bank rate, rather than $100000 received after 3 years time. Relevance of TVM in financial decisions while evaluating long term investment (capital budgetting) proposals,outflows/investments which take place at the commencement of the project I.e., at time=t0 have to be compared with inflows/returns which arise at future points of time I.e.,t1,t2,t3 etc.on account of difference in the value of money over time, cash inflows/returns expected to arise in future are to be converted into an unique time frame, say with reference to t0,so present value of future cash flows are to be considered for meaningful evaluation of investment proposal. The trade off between present cashflow and future cashflow depends on the rate of interest that can be earned by investing (opportunity cost).it impacts business finance,consumer finance & government finance thus time value of money results from the concept of interest. There are 2 methods of analysis 1)compounding present money to future date,finding out future value of present money.2)discounting future money to present date, I.e.,Finding out present value of future money.