What is the ‘Time Value of Money – TVM’

The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.

BREAKING DOWN ‘Time Value of Money – TVM’

Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money’s potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.

Basic Time Value of Money Formula and Example

Depending on the exact situation in question, the TVM formula may change slightly. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or less factors. But…