Time value of money is the idea that money now is worth more than an equal amount later

Time value of money is the idea that money now is worth more than an equal amount later

Kurtis Cathey

Time value of money is the idea that money now is worth more than an equal amount later (Fernando, 2021).  The idea is that money now can be invested over time and be worth more later than if an equal amount of money was received at the alter date (Block, et. al., 2019).  This is determined through the compounding interest formula of image, where FV is the future value, PV is the present value, i is the interest rate and n is the number of compounding unit, whether it be years, months or days (Block, et. al., 2019).  This formula and idea allow financial managers to estimate the future value of current capital, over time capital should increase due to interest rates and investments.  Derivatives of the formula above allow financial managers to see other factors of investment, such as how long current capital needs to be invested to earn a certain amount of future capital. Knowing all of this above, financial managers can make decisions on the amount to invest and the length of investments.  It also allows managers to decide whether to invest or not, if future value of the current capital is not substantially different or does not make economical sense then managers are able to not invest and use the capital more efficiently.

Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/

Fernando, J. (2021). Time value of money (TVM). Investopedia. Retrieved from https://www.investopedia.com/terms/t/timevalueofmoney.asp#:~:text=The%20time%20value%20of%20money%20(TVM)%20is%20the%20concept%20that,the%20sooner%20it%20is%20received.