Question

explain time value of money

explain time value of money

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Answer #1

Time value of money is a concept that explains that $1 received today is worth more than $1 received anytime in the future. You expect to earn some interest on that money. Hence, if the present value is $100 and the interest rate is 10%, the future value will be $100(1.10) = $110.

Present value = future value/ (1 + interest rate)^n

Future value = present value/ (1+interest rate)^n

As money has earnings potential, a sum of money today will have a higher value than the same sum of money in the future.

We can also derive the following equation to understand time value of money easily-

Future value = present value + time period

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