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Time value of money: A Concept of Finance

Time value of money: Everything You Should Know

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Time Value Of Money

In the simplest words, Time value of money or TVM indicates the decreasing worth of money with respect to time. TVM states that money that is available at present is worth more than the same amount in the future, due to its potential earning capacity. This center standard of account holds that gave cash can gain premium, any measure of cash is worth more the sooner it is gotten. One of the most fundamental concepts in finance states that money has a time value related to it.

Time Value of Money is the calculative thought which tells that the present cash is more commendable than a similar sum later on due relying upon the capability of its procuring limit. Fund conveys the center idea that gives that gave cash can premium, any measure of cash is worth more the sooner it is gotten.

One can interpret TVM in mathematical calculation. This further solves one of several variables in financial problems. A typical example of a variable would be a balance (the mentioned facts in a balance are the real and nominal value of a debt or a financial asset in terms of monetary units), a periodic rate of interest, the period numbers and a series of cash flows.

Time Value and Purchasing Power

The term “Purchasing power” refers to the number of goods and services that one can purchase with a unit of currency. Purchasing power is in charge of the adjustments in each part of financial matters, from buyers purchasing products to speculators and stock costs to a nation's monetary success.

Let’s take an example to understand the concept of Purchasing Power. Suppose you went shopping with one unit of currency in your hand, in the 1950s. This currency could either be gold or silver or fiat money. You could probably buy a greater number of items with that amount in that era than you could buy today. In other words, the currency had a greater purchasing power in the 1950s than it has today.

Basic Time Value for Money Formula:

In general, the most principal TVM equation considers the present value, then multiplies it by compound interest for each of the payment periods and factors in the time period over which the payments are made. Here’s a mathematical representation for your understanding:

Formula: FV = PV x [ 1 + (i / n) ] ^(n x t)

  • (FV) Future Value = What your money will be worth at some future time after it (hopefully) earns interest.
  • (PV) Present Value = What your money is worth right now.
  • (I) Interest = Paying someone for the time their money is held.
  • (N) Number of Periods = Investment (or loan) period.
  • (T) Number of Years = Amount of time money is held

Examples of Time Value For Money:

Concepts are understood more easily with the help of real-life examples. So, let’s pick some real-life scenarios to get hold of the TVM concept in a better manner:

Example 1:

Suppose you have a friend who gives you two offers:

  • Either he will pay you $1000 today
  • Or he will pay $1050 a year later

Now, assuming that there’s no risk involved, whatever offer you choose should depend upon the return you can earn on your money.

In the event that you can gain 6% on your cash, for example, at that point, you ought to acknowledge the $1,000 today. Whenever contributed for one year, it would develop to $1,060, beating the choice of getting $1,050 one year from now.

Be that as it may, on the off chance that you can just acquire a 4% return on your cash, you ought to acknowledge the idea of $1,050 paid one year from now. On the off chance that you acknowledge the $1,000 and contribute it at a 4% return, it will just develop to $1,040 in one year, contrasted with accepting $1,050 following one year from your companion.

Example 2:

For instance, assume a speculation worth of $100 with 5% enthusiasm for one year, subsequent to finishing the entire one year the cash will reach $105 ($100 duplicated by 1.05), when coming in inverse heading $100 got one year from now is just worth $95.24 today, ($100 partitioned by 1.05), with the suspicion of 5% premium.

So, that’s how Time Value Of Money works. The entire concept seems quite easy but university students often find themselves struggling when preparing for exams or working on assignments related to TVM. These difficulties may arise due to a number of factors like difficulty of the topic, lack of understanding or inability to implement one’s knowledge practically. All of this may cause the students to delay their assignments and panic in the eleventh hour. That’s where online assignment help services step in and help students cope up with all this stress.

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References:

  • (https://en.wikipedia.org/wiki/Purchasing_power)
  • (https://www.fool.com/knowledge-center/time-value-of-money.aspx)
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