The Time Value of Money Concept Can Be Defined as:
Time Value of Money (TVM), as well known every bit present discounted value, refers to the notion that coin bachelor at present is worth more than the same amount in the futurity, because of its power to grow.
The term is similar to the concept of 'fourth dimension is money', in the sense of the money itself, rather than one's own time that is invested. Equally long every bit money can earn involvement (which information technology tin), it is worth more the sooner you become it.
We all know that if nosotros eolith money in a savings account, it volition earn interest. That is why nosotros adopt receiving money now than the same amount at a hereafter date.
Time Value of Money is important in financial management. TVM can be used to compare unlike investment options and to solve problems involving mortgages, leases, loans, savings and annuities.
If you wait one yr to get your money, you are losing out on the opportunity to have that coin in the bank at present earning interest.
Case of Time Value of Money
Imagine y'all lent a friend $1,000 and he paid you back today. You lot immediately eolith that money into an account that earns seven% annually. Information technology will exist worth $1,070 in exactly one year's fourth dimension.
If, on the other hand, you received the $i,000 in one year'south time, it would only exist worth $934.58 ($one,000 ÷ 1.07), bold a 7% almanac interest charge per unit.
If yous asked people whether they would adopt to receive $1,000 at present or that corporeality in ane year's time, they would probably all say they wanted information technology now, for several reasons:
- They want to exist certain they get the money. Waiting a yr increases the take a chance of non getting the money.
- They may desire to get out shopping or proceed vacation before long, and that coin would be useful.
- If they invested that coin today in a deposit business relationship, the $1,000 would exist worth more in i year's time. They are aware of the Time Value of Money.
A key concept of TVM is that a series of equally, evenly-spaced instalment payments or a single lump sum, or receipts of futurity pledged payments can be converted to an equivalent value at present.
One may also determine the whole thing the other way circular, the value to which 1 single sum or a series of future payments will take appreciated at a hereafter date.
Video – What is Time Value of Coin?
Source: https://marketbusinessnews.com/financial-glossary/time-value-of-money/
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