Money has a time value because the value of money today has more
worth than the same amount of money. This is due to the opportunity
cost involved and inflation involved . Hence the Present value of
cash today will have higher value than future value of same
amount.
Real life examples
An amount of 10000 is deposited in the bank today at rate of
10%
After 2 years the future value = Present Value *(1+rate)^n =
10000*(1+10%)^2 = 12100
After 2 years banks will pay 12100 for a PV of 10000. This is an
application of time value of money.
Time value of money is also used to value stock price from dividend
and also to calculate value of firm from free cash flow.
Get Answers For Free
Most questions answered within 1 hours.