Time Value of MoneyTVM

The idea that money available now is worth more than the same amount later, because it can earn a return in the meantime.

Formula

Future value = present value × (1 + r)^n

Also called TVM.

The time value of money says a birr in your hand today can be invested and grow, so it is more valuable than a birr you only receive in a year. Discounting future cash flows to today’s terms is how investors compare offers that pay out at different dates.

Key takeaways

Interest rates and investment returns are the practical reason waiting has a cost.
Present value converts a future payment into what it is worth now at a chosen rate.
Inflation also erodes purchasing power over time, which strengthens the case for earning a return.
Loan schedules, bond prices, and project appraisals all rest on this idea.

Related terms

Interest RateThe cost of borrowing money, or the return paid on savings, expressed as a percentage.
Present ValueToday's worth of a future cash amount after discounting it at an appropriate interest or required return rate.
Compound InterestInterest calculated on both the original sum and on interest already added in earlier periods.

Time Value of Money in our reporting

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