Time Value of Money

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What is the Time Value of Money? Meaning.

The Time Value of Money is the fundamental financial concept that an amount of money in hand today is worth more than the same amount of money in the future. This is caused by the return that you could earn on investing the money or simply placing it in a bank account and receive interest.

Time allows one the opportunity to postpone consumption and earn interest. Not having the opportunity to earn interest on money is called Opportunity Cost.

There is also a risk factor included in the term, because $100 today is more certain than $100 in a year from now.

Examples of Time Value of Money

The Future Value of an amount PV in n years with interest rate r can be calculated as follows: FV = PV x (1 + r)ⁿ

Example. How much will €100 be worth in 2 years, presuming an interest rate of 4%?  FV = €100 x (1 + 0,04)² = €108,16

The Present Value of an amount FV in n years from now with interest rate r can be calculated as follows: PV = FV x 1 / (1 + r)ⁿ

Example. How much is €100 in 2 years worth now, presuming an interest rate of 4%?  PV = €100 x 1 / (1 + 0,04)² = €95,20

Forum Forum about the Time Value of Money. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Time Needed to Double your Money How long does it take approximately to double $9,000 at a compound rate of 8% per year?... 3   2 comments 🔥 Valuing Stocks Using Dividends: The Dividend Discount Model The value of a stock in its simplest sense is the present value of the cash flow expected to be provided by that stock (plus any increase of the share price). The dividend discount model, a formula u... 2   Start a new topic about the Time Value of Money Ask a question or explain something

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Compare with: Net Present Value  |  Depreciation  |  Amortization  |  Rule of 72  |  Residual Value  |  Internal Rate of Return  |  Discounted Cash Flow  |  Time to Market

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