Time Value of Money: Concept Formula & Examples Guide

Time Value of Money

Finance is perhaps the most challenging course for students around the world. A part of why this course is so incredibly complicated is the topics you need to study and write exceptional papers on. One such topic happens to be the time value of money. It isn't unusual for students worldwide to seek the time value of money assignment help to them comprehend the topic and develop a profound knowledge of the complications associated with it.

But, the time value of money concept is one of the vital topics in the field. If you are not well-versed with the time value of money formula or example and still need to deliver exceptional solutions within a week, you have landed on the right page.

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What Is The Concept Of The Time Value Of Money?

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Trying to figure out what is the time value of money exactly? Find out all your answers right here

Time value of money or TVM is a fundamental financial concept, stating that the present value of the money is significantly higher than its future value, given its potential to earn in the years to come. In simple words, it suggests that a sum of money in hand is greater in value than the same sum of money that will be received in the next couple of years.

Let us look at an example to understand the concept of the time value of money better-

Suppose you are the lucky winner of a $2 million lottery, and you are presented with two choices. A lump-sum payment right now is worth $1 million or 10 annual payments of $100,000 (totaling $1 million over that time). This is excluding any tax ramifications; which is the better option?

TVM tells us choice one- the lump sum payment right now. This is best as it offers you the ability to put the money to work earning interest or growing via some other investment vehicle like stocks or real estate.

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How to Describe Time Value of Money Formula?

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Take a look at the time value of money equation you need to know to revamp your assignment game by notches-

FV= PV * (1+ i/n) ^n*t

Or,

PV= FV/ (1+ i/n) n*t

Here,

PV= Present value of money

FV= Future value of money

i= Rate of interest or present yield on similar investment

t= Number of years

n= Number of compounding periods of interest each year

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What Is The Time Value of Money Example?

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Here are certain crucial time value of money examples dished out by our stalwarts that you must know to comprehend the topic and strengthen your foundation in the subject like never before-

Imagine Susan could earn 10% annual interest at her bank. And, imagine a friend of Susan owed her money. That friend offered to pay Susan back $1000 today or $1050 a year from today. Since Susan could have $1,100 next year if she had put that $1,000 in the bank on the present day, Susan can take the immediate repayment. The time value of $1050 in a year is less than $1000 today.
You purchased a 1kg silver bar for $600 per gram 2 years ago. Today the market rate of silver is $400. This implies the silver bar you bought has lost its value.
Again, assume that someone offers to pay you one of the two ways for some work you are doing for them. They will either pay you $1000 now or $1,100 one year from now. Which pay option will you take? It depends on the kinds of investment return you can earn on the money in the present time. $1,100 is 110% of $1000. If you think you can make more than a 10% return on the money by investing it over the next year, you should choose to take $1000 now.

On the other hand, if you don't think you could earn more than 9% in the next year by investing the money, you must take the future payment of $1,100.

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Most Popular Questions Searched By Students

Q1. What is meant by the time value of money?

Ans. The time value of money is a core principle of finance. TVM, or the time value of money, implies that a sum of money is worth more now than the sum of the money at a future date due to its earnings potential in the interim. This is mainly because money today can be used, grown, or invested.

Q2. What are the 3 elements of the time value of money?

Ans. The 3 crucial elements to calculate the time value of money are principal, interest rate, and time.

Q3. What is the time value of money? Give Examples.

Ans. The time value of money implies the amount of money that you could earn between today and the time of a future payment. A remarkable example of a time value of money is- A wins a lottery of $1000 and has two options. Either A can take a lump sum right at the moment or receive the same after a year or two. The winner will choose the first option as the winner can invest the money and receive $1200 or more in the next two years.

However, on the other hand, if A chooses to go otherwise, it will be the same $1000 even after two years.

Q4. Why is TVM important?

Ans. The time value of money is important as it helps investors and people saving for their retirement figure out how to get the most out of their dollars. It helps them to comprehend the worth of money in relation to time. This concept is crucial to financial literacy and applies to your savings, investments, and purchasing power.