Question

Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of time value of money?

Answer 1

Value of $1 received today is not equal to the value of $1 received on a future date due to following two reasons:

a. Inflation [today's money has more purchasing power] and

b. Risk [future money is uncertain]

This difference in money value due to time is referred as "Time value of money"(TVM). TVM is expressed as a interest rate (percentage) and has two components inflation rate & risk premium.

Example:

Bank deposit will provide interest along with principle at the time of maturity.