Understanding Time Value of Money


Added on  2019-09-25

9 Pages2762 Words301 ViewsType: 301
The time value of money indicates stipulated that money earned today will be more than its intrinsic value when we become more specific we can say that the money we have right now could be worth more than in the future than today. In personal finance, the risk and the return arethe concepts that each boils to a pretty simple statement. This two concept expect a dollar risked to high return than a dollar. This blog contains the concept describing the time value of money and how should you use it? For investment in finance, the time value of money is essential. This concept helps to understand why interest rate has paid or earned on deposit or the debt, compensate the parties based on the time value of money. What time value of money is?The time value of money is an integral area in the field of finance. Money is the determinant of present and worth than tomorrow's future value of money as it involves opportunity cost waiting.The time value of money is related to the concept of inflation and purchasing power, the value ofmoney fluctuates and gradually erodes its purchasing power and value. When you using your money to lend or to invest you certainly expect higher returns. The aim is to maximizing compensation without that money for a short time. Money has time value let us take the example of the money you have today is more value in the future than it will be in two or three years. With the time money has large potential. The earning capacity of the amount of money will be more than the intrinsic value. The time value of money is also known as the present discounted value. You deposited money into a savings bank account and earns an interest rate to compensatefor without keeping the money at the current period. If a bank holder deposits $ 200 in the account, he expects to receive more after one year than $ 200.There are reasons for the time value of money. In an uncertain future, one can control the spending but not control the income or the inflows. Everybody wants to avoid risk and prefer cash receipts nowadays. Reason inflation, the economic trend defines inflation. The money you received now is more useful than the money you received in the future. The last reason is the
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attached interest factor when the particular amount of money is received and paid after some time. The values in the present and future are different. People invest their income in the hope of higher returns in the future. This factor helps to consider the dilemma of uncertainty that cash flows don't have any uncertain thing. The concept of present value and future value calculation solve the corporate world's financial management that is related to capital budgeting, investment decisions, etc. If you are smart, you should use the money to create more from that, this can provide high opportunity. It is based on the investment plan where you invest your money. The opportunity cost can compare the plans. The yield rate determines the returns you get. The time value of money states that money has large potential and. If simply said the value is more than tomorrow. The efficient way of lending money is that the person agrees to take the risk and higher purchasing power.The opportunity cost for each choice you made there are choices sacrificed. The choice to go for education to college is an easy example of opportunity cost. The choice in between you are giving up 5 years worth of your salary you would have generated at a job and 5 years of work experience that is the future payment. Straight forward you hope that by investing in property, you will make more money in the future over your lifetime than if you don't go college and attend. Its type of gambling can calculate hopefully has an additional significant pay off finally than you had opted to not go to college. This shows that the time value of money varies proportionately and includes an opportunity cost.That clarifies if you are putting your investment of $ 2000 in a saving account to save for future to purchase property, you may be forecasted an opportunity to be increasing that money is an investment account. For example, the calculation of time value of money tells you that rather than investing you should be paid down the debt that cost you more up to hundreds per month.How you should use the time value of money?
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Money has time value let us take the example of the money you have today is more value in the future than it will be in two or three years. You lend money to your friend. You can determine more earning if you lend money and he repays you at present $ 4000 or $4100 later. You can opt for this opportunity to invest somewhere other than that of late payment. There are other time preferences you receive the payment presently or wait. This is the reason for the importance of the present value of money. It is more worth than the future value of money.Another example of the time value of money consideration for a longer period. If the money repaid you after 45 years . to justify this factorPurchasing power- the exchange of money can take place for goods and services. For instance many years ago the rupee has a huge value than the present.Risk and return- the risk of getting back the money are associated with the lending amount. The default risk contains whether you may or may not get back your own money. That's why the more compensation you expect in return. For example If your lending money to a person who goes bankrupt or insolvent, you lose your money. If you're considering yourself as an individual or for a business decision, we can use the exampleof how to apply the time value of money. To measure the time value of money the formula of present value applies by using compound interest rate.Future value = present value (1 +(i/n) (n×t)For the use of the time value of money, it is important to understand the present value and future value of money.The present value of money
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