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Time Value of Money
Time Value of Money
LEARNING OBJECTIVES:
1) To define time value of money
2) To determine the formula of the Present Value of Money
and Future Value of Money
3) To solve problems regarding present and future value of
money
I.DISCUSSION:
This is a core principle of finance. A sum of money in the hand has greater value than
the same sum to be paid in the future.
KEY TAKEAWAYS
Time value of money means that a sum of money is worth more now than the same sum of
money in the future.
This is because money can grow only through investing. An investment delayed is an
opportunity lost.
The formula for computing the time value of money considers the amount of money, its
future value, the amount it can earn, and the time frame.
For savings accounts, the number of compounding periods is an important determinant as
well.
As another example, say you have the option of receiving $10,000 now or $10,000 two
years from now. Despite the equal face value, $10,000 today has more value
and utility than it will two years from now due to the opportunity costs associated with
the delay.
FV = PV x [ 1 + (i / n) ] (n x t)
The formula can also be rearranged to find the value of the future sum in present day
dollars. For example, the present day dollar amount compounded annually at 7%
interest that would be worth $5,000 one year from today is: