What Is the Time Value of Money (TVM)?
The time value of money (TVM) is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.
Key Important note:
- Time value of money is based on the idea that people would rather have money today than in the future.
- Given that money can earn compound interest, it is more valuable in the present rather than the future.
- The formula for computing time value of money considers the payment now, the future value, the interest rate, and the time frame.
- The number of compounding periods during each time frame is an important determinant in the time value of money formula as well.
I.Time Value of Money Formula
- FV = Future value of money
- PV = Present value of money
- i = interest rate
- n = number of compounding periods per year
- t = number of years
Based on these variables, the formula for TVM is:
FV = PV x [ 1 + (i / n) ] (n x t)
II.Present Value of Money Formula
FV=Future Valuer=Rate of returnn=Number of periods