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Can you explain time value of money to me

Feb 17, 2024

Can you explain time value of money to me

Answer

The time value of money (TVM) is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Solution

Definition: The time value of money (TVM) is a financial principle that describes how the value of money changes over time

Formula for Future Value: The future value (FV) of a single sum of money can be calculated using the formula

FV = PV(1 + r)^n

where

PV

is the present value,

r

is the annual interest rate, and

n

is the number of years

Present Value Concept: Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. The formula for calculating PV is

PV = \frac{FV}{(1 + r)^n}

where

FV

is the future value,

r

is the annual interest rate, and

n

is the number of years

Key Concept

Time Value of Money (TVM)

Explanation

TVM is a fundamental financial principle that emphasizes the importance of time in the value of money, illustrating how money's worth changes over time due to its potential earning capacity.