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Why is it important to understand the Time Value of Money and the differences between Present...

Why is it important to understand the Time Value of Money and the differences between Present Value and Future Value of money?

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Answer #1

The amount of money worth today will not be equal to the same worth on a future date.

This concept is known as Time Value of Money. Due to inflationary economy, worth of money decreases over time. It is important to understand time value of money so that we can take informed decisions.

We can compare our alternatives and choose the right one.

Amount today should never be compared with the amount on a future date.

Amount today should be compared with the present value of future amount.

Hence, it is important to understand the concept of time value of money

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