Time Value of Money (TVM) Definition Formula & Calculation with Example

The concept of time value of money is a concept in the financial management which explains that the monetary received now has more value the same amount which will be received in the future.  The potential of the money invested and the interest earned when the amount is deposited is much more than the amount that will be received in the future. And this concept is the primary base of the concept of the time value of money and it is one of the primary principal of the Western finance. One of the easiest ways to understand about the concept of the time value of money is through an example.

For example, if you have spent or have loaned someone around two thousand dollars, then would you like to be repaid. For suppose, if the person is repaying you’re the amount through than EMI system, then you can be repaid in two type. For suppose, if the is paying half the amount t today and rest of the amount  later, then the monetary value will be much lower if the amount is paid in full today as if the amount is invested today in a bank, then the interest received will me much higher which will eventually raise the total amount. And this is the primary concept of the time value of money as if you receive the amount today, then you can use the money today as well.

What is Time Value of Money?

 

The present value of money is much higher than the value of the money is much higher than the future value of the same amount of money. And the primary reason behind this is that there is an opportunity of cost which is available along with it. Moreover, along with the opportunity, there is another drawback which is you won’t get the money instantly. The inflation slowly eats up the purchasing and value power of the money. Whenever you lend your money to someone, you always expect to get a larger return than the amount submitted. And the primary objective of investment is to always to gain profit.

time-value-of-money-concept

Regardless if you are investing or lending, the primary objective is to get more return than the money invested. For instance, if you have lend two thousand dollar to anyone and he/she is promising to pay you back with two thousand and fifty dollar, You must then tally it with other investment options and check the possibility amount of return so whether you will get more than fifty dollar if you invest in the other places or you will get less amount than that. The primary principle of finance is that you will be availed with interest with the amount of money that you have invested against the principle amount. The time value of money can also be referred as the present discounted value as well.

The time estimation of cash draws from the possibility that judicious financial specialists want to get cash today instead of a similar measure of cash later on in light of cash’s capability to develop in an incentive over a given timeframe. For instance, cash kept into a bank account acquires a specific loan fee and is along these lines said to compound in esteem.

The time estimation of cash matters in light of the fact that, as the premise of Western fund, you will utilize it in your day by day shopper, business and banking basic leadership. These frameworks are driven by the possibility that loan specialists and financial specialists gain premium paid by borrowers with an end goal to augment the time estimation of their cash. Your activity inside this framework is to constrain the expense of cash to you and to expand returns on your ventures.

The idea isn’t new – it goes back to old occasions – and in spite of the fact that, likewise with Islamic fund, there might be societies that deny charging interest, their choices are driven by comparative financial ideas. In contributing and getting, buyers frequently walk a fragile line of endeavouring to amplify the time estimation of their cash while keeping away from an excess of hazard.

As costs rise, many interpretation of obligation to have the option to manage the cost of homes, vehicles, excursions and other mind-boggling expense things. That is the reason it’s imperative to take a gander at the sort of premium you’re disbursing and how it might change ended the long haul while additionally looking to make solid comes back to reinforce the time estimation of your cash.

How is the value of money calculated?

In the event that you have cash put resources into an authentication of store (certificate of deposit), odds are it wages you a fixed loan cost. Fixed rate alludes to a loan cost that won’t change after some time. Something contrary to that is a adjustable rate, which is a advance fee that changes relying upon how much standard rates rise or drop in the open arcade. Time estimation of cash differs and includes an open door cost. That implies that in case you’re investing the $1000 in the certificate of deposit, you might forego a chance to utilize the cash as a decent confidence store on a home. Computing the time estimation of your cash should reveal to you that as opposed to contributing by any stretch of the imagination, you ought to have rather settled costly factor rate charge card obligation that is costing you hundreds every month.

An instrument or credit with a adjustable rate recalculates the scheming paid or charged occasionally.

The formula to calculate the value for money is FV = PV x [ 1 + (i / n) ] ^(n x t) in which the PV stands for Present value, the FV stands for Future value, I stands for interest, N stands for number of periods and the T stands for number of years. For example if you have  PV of two thousand dollars, and you invest the sum in an interest rate of 10%, the FV turns out to be FV = $2,000 x (1 + (10% / 1) ^ (1 x 1) = $2,200.

Leave a Reply