## Time Value of Money

## Definition

The time value of money is the greater benefit of receiving money now rather than later. It is founded on time preference.

### Time Value of Money

Time value of money is a concept according to which the value money present at the current time is worth more than how much the same amount of money will be worth in future. This is because of the potential earning capacity money has. Regarded as one of the core principles of finance, it holds that if the money can earn interest, it is worth more the sooner it is in your hand. So basically, the time value of money incorporates the benefits of receiving the money now than later. It is based on the idea of time preference.

Investments are also highly dependent on the idea of time value of money. Hence, if an investor expects to get a favorable return on their investment in the future, they may forego spending their money now.

### Calculation

### There is a simple formula to calculate the time value of money:

PV = FV (1 + r)

Where:

PV = the present value of money

FV = the future value of the same amount of money

r = the interest rate applied to the amount

Thus, to calculate the future value of money, you have to discount it to an amount that equals the present value of money. This will give you an idea about how much the money you have right now will be worth in the future and you can take important decisions accordingly then.

From this formula, you can also calculate the present and future values of annuity, as well as, the present and future value of perpetuity.

### Why is it better to Receive Money Now?

It is a universal fact that a person will prefer receiving any amount of money now, then receiving the same amount in the future. Why? This is because the interest rate applied on it will increase the net worth of the same money and make it more than the amount in hand today.

For example, if there is an interest rate of 5% applied on the $100 invested today. In a year’s time, the same amount will be worth only $95.24. Hence, the present value of money is greater than the future value of the same amount of money provided that an interest rate is applied on it.

### Time Value Of Money FAQ

#### What is time value of money with example?

#### What do you mean by time value of money?

#### Why time value of money is important?

#### How do you calculate time value of money?

#### What causes time value of money?

#### What is time value of money used for?

### Further Reading

**The time value of money concept in Islamic finance**

books.google.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**An EOQ model for deteriorating items with price-and stock-dependent selling rates under inflation and time value of money**

www.tandfonline.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**Public Discovery of the Concept of Time Value of Money with Economic Value of Time**

www.emerald.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**Inventory model for deteriorating items and time value of money for a finite time horizon under the permissible delay in payments**

www.tandfonline.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**Economic production lot size for deteriorating items taking account of the time-value of money**

www.sciencedirect.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**Role of the time value of money in financial reporting**

search.proquest.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**An inventory model for ameliorating and deteriorating items taking account of time value of money and finite planning horizon**

www.tandfonline.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**Supporting financial decision-making based on time value of money with singularity functions in cash flow models**

www.tandfonline.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …

**The concept of the time value of money: A Shari 'ah viewpoint**

platform.almanhal.com [PDF]

… Page 96. Ahmad and Hassan: The Time Value of Money 79 The Monetary Valuation of Time in Credit Transactions The importance of time in conventional economic analysis derives not only from the presence of a time element in economic activity, but also from the …