INTRODUCTION

The time value of money (TVM) is the concept that a sum of money is worth more now than the same
sum will be at a future date due to its earnings potential in the interim. The time value of money 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. The time value of money is also referred to as the present discounted value.

The time value of money (TVM) is a fundamental concept in finance that reflects the idea that a sum of
money has a different value today compared to its value in the future. This principle is based on the
understanding that money has the potential to earn interest or experience inflation over time. The
importance of the time value of money can be highlighted in several key areas:

1. Investment Decisions: TVM is crucial for evaluating and comparing different investment
opportunities. By discounting or compounding future cash flows to their present value, investors
can make more informed decisions about where to allocate their capital. It helps in assessing
the true profitability and risk of investment projects.

2. Cost of Capital: Businesses and individuals often borrow money or seek financing for various
purposes. Understanding the time value of money is essential for determining the cost of
capital. This helps in setting interest rates, assessing the feasibility of projects, and making
decisions about debt and equity financing.

3. Budgeting and Financial Planning: TVM is essential for effective budgeting and financial
planning. Individuals and businesses need to account for inflation and interest rates when
projecting future cash flows and determining the present value of their financial goals.

4. Valuation of Assets and Liabilities: The time value of money is integral to the valuation of assets
and liabilities. Whether it's valuing a company, real estate, or any other asset, the concept helps
in determining their worth by discounting or compounding future cash flows.

5. Retirement Planning: When planning for retirement, individuals need to consider the time value
of money to ensure they have enough savings to meet their future needs. TVM helps in
estimating the future value of investments and determining how much money should be saved
regularly to achieve specific financial goals.

6. Loan Amortization: TVM is applied in loan amortization, where future loan payments are
discounted to their present value. This helps borrowers and lenders understand the cash flow
implications and interest costs associated with a loan over time.

7. Inflation and Purchasing Power: Factoring in inflation, the time value of money is crucial for
assessing the real purchasing power of money over time. It highlights the need to account for
the eroding effect of inflation on the value of money.

In summary, the time value of money is a fundamental concept that permeates various aspects of
finance and decision-making. Whether in investing, financing, or planning for the fu