The Time Value of Money - Essay Example

Only on StudentShare

Extract of sample
The Time Value of Money

However, this is not the case with the $10000 received 3 years from now. Its value will be $10000 only since no interest will be earned as illustrated in the figure below:
In short, we can say that "a dollar today is worth more than a dollar one year from now" because the time value of money decreases over time. Why it decreases is the actual question. Interest rate, as we saw above is one apparent reason why money is related to time. Investing the money today would enable you to earn interest, causing it to grow to a larger amount over time. Let us now examine some of the other reasons and their impact on the time value of money.
Present value refers to a value that is equal to a value or values in future that have been discounted at relevant interest rate. For example, if you are expected to receive $10000 three years from now, the value of this 10000 today would be $9497 if the interest rate is 5% (PV= FV/ (1 + i )N) ) but if you were to receive $10000 five years from now, the present value would only be $7836.This $9497 at the beginning of the period is equal to $10000 at the end of the three years , showing that the value of money is related to time and therefore, causing the present value of an amount in the future to be less and less, the more you have to wait for it. ...
Download paper


To understand time value of money, suppose that you are offered two options. You can take $ 10000 today or $10000 five years from now. Which one should you choose Many of us would accept the first option since it will provide us with the $ 10000 today and we humans, being impatient would not want to wait for 3 years for this $ 10000.
Author : beckermargarett

Related Essays

Time Value of Money
Therefore, to make a certain investment, the opportunity costs should be low (David, 1984).
3 pages (753 words) Essay
The Value of Money
Compound interest is different from the simple interest on the grounds that it takes into account the accumulated interest that has to be paid over the years and the principle for compound interest assumes that interest should also be paid on the accumulated interest. Compounding can be done annually, semi-annually or quarterly depending upon the circumstances.
3 pages (753 words) Essay
Utilizing the Time Value of Money
But do to some limitations of these tools other tools such as Profitability Index and Payback Period. The payback period determines the duration of the time it would take to recover the investment made initially. This will give us the number of periods it would take to breakeven for the initial investment made. The profitability index is used as well in investment decisions because it measures the value created per dollar invested. So if the PI shows a greater than 1 value, then it means that the investment is returning a greater amount than invested. These two techniques are used because they...
2 pages (502 words) Essay
Project appraisal techniques and methods vary in their importance and significance therefore their use is also dependent upon what are the intended objectives of the finance managers while assessing and evaluating projects. It is also important to note that the basic method which is now being widely accepted as more credible mean of project appraisals is based on the time value of money concepts. Since the project appraisal methods include both the TVM and non- TVM based methods therefore it is up to the finance managers to decide what basic philosophy and method they intend to apply.
7 pages (1757 words) Research Proposal
Time value of money
rns are reinvested, an amount of money invested now grows to a greater amount in the future .Conversely, a specific amount of money that is to be paid out or received in the future is worth less in the present. 
5 pages (1255 words) Research Paper
Got a tricky question? Receive an answer from students like you! Try us!