Time Value of Money

Finance

Quick Definition

Time Value of Money is a financial concept that states money available today is worth more than the same amount in the future due to its earning potential.

Detailed Explanation

The Time Value of Money is based on the idea that money can earn interest or returns over time, so receiving money earlier allows it to grow.

It is a fundamental concept used in investment decisions, loan calculations, and financial planning.

Key Concepts in TVM

  • Present Value (PV): Value of money today
  • Future Value (FV): Value of money in the future
  • Interest Rate (r): Rate of return
  • Time Period (n): Duration of investment

Basic Formulas

👉 Future Value (FV) = PV × (1 + r)ⁿ
👉 Present Value (PV) = FV ÷ (1 + r)ⁿ

Why Time Value of Money Matters

  • Helps compare investment options
  • Important for loan and EMI calculations
  • Used in valuation methods like DCF

Key Insight

  • ₹1 today > ₹1 tomorrow (because it can earn returns)

Example

"If you invest ₹1,000 at 10% interest for 1 year: 👉 Future Value = ₹1,100"

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