Time Value of Money
Time value of money (TVM) is based on the concept that money has a time value and that money’s value changes with time. TVM asserts that money received today is worth more than the same amount received in the future because of the interest that can be earned by putting it in a savings account or in other investment accounts. This difference in value between money received today and money received in the future is called time value of money. It brings to mind the old adage,“A bird in the hand is worth two in the bush.”
The theory of the time value of money allows business owners, financial managers, money savers, and investors to find and compare the value of future payment. Through the use of a formula called “risk free rate of return,”they are able to calculate today’s value of that future money and decide whether it is worth investing.
Several factors determine time value of money:
- Annual interest rate
- Number of periods or number of times interest or dividends payment are made
- Present value
- Future value
When making a financial decision, always remember that receiving a dollar in the future has uncertainty attached to it; factors such as inflation might make the dollar received at a later time worth less in buying power.
Learn more today about the TWC Finance approach to TVM to determine a periodic payout, an interest rate on a loan, or to decide between leasing and buying equipment.