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describe the Time Value of Money (TVM) concept with an example in your own words and...

describe the Time Value of Money (TVM) concept with an example in your own words and explain why it is important to investors.

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Answer #1

Time Value of Money is a concept that the money today is worth more than the same amount of money.

The formula for TVM is:

PV = FV/((1+r)^n)

  • FV = Future value of money
  • PV = Present value of money
  • r = interest rate
  • n = number of compounding periods

For Ex- You have an option of receiving $100 today or after an year. You know that the return on savings account is 10%

$100/(1+10%) = $90.90

So, you will definitely prefer receiving $100 today.

This concept is important to investors because it helps them in making informed decisions and help them understand which is a better option based on interest, inflation, risk and return.

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