BTL 772 - Time Value of Money (TMV)

 

The Banking Tutor’s Lessons

BTL 772                                                                          12-04-2025

Time Value of Money (TMV)

The Time Value of Money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date.

 

The time value of money is also referred to as present discounted value.

 

Money can grow only if it is invested over time and earns a positive return. Money that is not invested loses value over time.

 

The concept of the time value of money can help guide investment decisions.

 

The time value of money is the central concept in discounted cash flow (DCF) analysis, which is one of the most popular and influential methods for valuing investment opportunities.

 

It is also an integral part of financial planning and risk management activities.

 

Pension fund managers, for instance, consider the time value of money to ensure that their account holders will receive adequate funds in retirement.

 

The time value of money is used to make strategic, long-term financial decisions such as whether to invest in a project or which cash flow sequence is most favourable.

 

Businesses often use time value of money to compare projects with varying cash flows.

 

Individual investors use time value of money to better understand the true value of their investments and obligations over time.

 

Present value (PV) is the concept that states an amount of money today is worth more than that same amount in the future.

 

Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth over time.

 

The concept of time value of money refers to the fact that money say Re. 1 received today is different in its worth from Re. 1 received at any time in future. In other words money received in future is less valuable than the equal amount of money received today.

 

Sekhar Pariti

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