Time Value of Money

The time value of money is the value of money with a given amount of interest earned or inflation accrued over a given amount of time. The ultimate principle suggests that a certain amount of money today has different buying power than the same amount of money in the future. This notion exists both because there is an opportunity to earn interest on the money and because inflation will drive prices up, thus changing the “value” of the money. The time value of money is the central concept in finance theory.

There following are some of the reasons for this preference for current money:

  • Future uncertainties
  • Preference for present consumption
  • Reinvestment opportunities

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