Time_value_of_money Time_value_of_money

Time value of money - Definition and Overview
Related Words: Account, Admire, Adore, Advantage, Appraisal, Arrangement, Assay, Assessment, Atmosphere, Avail, Balance, Barometer, Bearing

The time value of money (TVM) or the present discounted value is one of the basic concepts of finance. We know that if we deposit money in a bank account we will receive interest. Because of this, we prefer to receive money today rather than the same amount in the future. Money we receive today is more valuable to us than money received in the future by the amount of interest we can earn with the money. This is referred to as the time value or cash value of money. It is the change in purchasing power of money over time.

It also takes into account default risk and inflation. 100 monetary units today is a sure thing and can be enjoyed now. In 5 years that money could be worthless or not returned to the investor.

To adjust for this time value, we use two simple formulae. The present value formula is used to discount future money streams: that is, to convert future amounts to their equivalent present day amounts. The future value formula is used to convert today's money into the equivalent amount at some time in the future.

Contents
1 Future value
2 Present value
3 See also
4 External links

Future value

One hundred units invested today at a 5% per year interest rate will yield:

<math>{\rm Future\ value} ={\rm present\ amount}\times(1+{\rm interest\ rate})^{\rm term}=\ 100\times{(1+0.05)^1}=\ 105<math>

after 1 year. So, the future value of 100 units in 1 year at 5% per year is 105 units. See future value for details.

Present value

One hundred units 1 year from now at 5% interest rate is today worth:

<math>{\rm Present\ value}=\frac{\rm present\ amount}{(1+{\rm interest\ rate})^{\rm term}}=\frac{\ 100}{1.05}=\ 95.23.<math>

So the present value of 100 units 1 year from now at 5% is 95.23 units. See present value for details.

See also

External links

Example Usage of value
ohsoimmaculate: @Boryokudan *frowns behind her mask, sighing* Well, now you're working with me. I value efficiency above all else, alright? Get the organs-
resumeanalyzer: @Steven_Rubinst Add value to your resume handling with resume parsing www.hrsoftware.us
practicalguide: Pre-purchase 2day & receive,The 7 Secrets to Exceptional Living,the e-book,audio book & a published copy of the book.A $70 value for $24.95
Copyright 2009 WordIQ.com - Privacy Policy  :: Terms of Use  :: Contact Us  :: About Us
This article is licensed under the GNU Free Documentation License. It uses material from the this Wikipedia article.