Time Value of Money
Time Value of Money
The time value of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The time value of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future by the amount of interest we can earn with the money. If $90 today will accumulate to $100 a year from now, then the present value of $100 to be received one year from now is $90. To fully understand time value of money one must first understand a few terms. Present value and future value are totally different. They also have their disadvantages and advantages; it just depends on how they are used. Of course, present value is what you have right now at this present time. While future value is the amount of money you will have at a given time in the future. Future value has a tendency to be deep; meaning that who knows the future. Interest rates fluctuate everyday; so one can be losing while the other is gaining. Money is known to be worth more now in the present time than in the future. It is worth more now because you can invest it and earn interest. Ben Franklin once said, "The inherent ambiguity of the value of time promotes accommodations and rationalization and may explain the rather obvious observation that most people are a lot more willing to waste time than money." Money is easy access, whereas the opportunity cost for time is vague. Money is readily exchangeable, time is not, and it is perishable. So observing this statement, money will always be around. Time never goes backwards only forward. If you actually think about it, people have plenty of opportunities each and everyday to spend (or waste) their time, but the transactions may be more
The time value of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The time value of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future by the amount of interest we can earn with the money. If $90 today will accumulate to $100 a year from now, then the present value of $100 to be received one year from now is $90. To fully understand time value of money one must first understand a few terms. Present value and future value are totally different. They also have their disadvantages and advantages; it just depends on how they are used. Of course, present value is what you have right now at this present time. While future value is the amount of money you will have at a given time in the future. Future value has a tendency to be deep; meaning that who knows the future. Interest rates fluctuate everyday; so one can be losing while the other is gaining. Money is known to be worth more now in the present time than in the future. It is worth more now because you can invest it and earn interest. Ben Franklin once said, "The inherent ambiguity of the value of time promotes accommodations and rationalization and may explain the rather obvious observation that most people are a lot more willing to waste time than money." Money is easy access, whereas the opportunity cost for time is vague. Money is readily exchangeable, time is not, and it is perishable. So observing this statement, money will always be around. Time never goes backwards only forward. If you actually think about it, people have plenty of opportunities each and everyday to spend (or waste) their time, but the transactions may be more
References: Wikipedia contributors (2006). Time value of money. Wikipedia, The Free Encyclopedia. Retrieved 17:00, February 24, 2006 from http://en.wikipedia.org/w/index.php?title=Time_value_of_money&oldid=40860504.