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What is The time value of money?
Every stage of life requires financial decisions. Whether it’s a decision for yourself or the future of your family, such as deciding to deposit money. investment decision loan decision buying a house, buying a car But since no deposit or loan, there must be a factor of duration, interest or even inflation rate involved. This will make 1 baht worth different from time to time. to assess the impact of various sums on the financial status and making appropriate decisions, so it cannot be done by looking at the numbers that appear but must calculate the true value of that lump sum as well.
The time value of money means that a sum of money is worth more now than the same sum of money in the future. The principle of the time value of money means that it can grow only through investing so a delayed investment is a lost opportunity.
What Is the Time Value of Money (TVM)?
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 due to its earnings potential in the interim. The time value of money is a core principle of finance. A sum of money in the hand has greater value than the same sum to be paid in the future. The time value of money is also referred to as the present discounted value.
Formula
What are the 3 elements of time value of money?
They are:
- Number of time periods involved (months, years)
- Annual interest rate (or discount rate, depending on the calculation)
- Present value (what you currently have in your pocket)
- Payments (If any exist; if not, payments equal zero.)
- Future value (The dollar amount you will receive in the future.
Key Concept:
- The time value of money means that a sum of money is worth more now than the same sum of money in the future.
- The principle of the time value of money means that it can grow only through investing so a delayed investment is a lost opportunity.
- The formula for computing the time value of money considers the amount of money, its future value, the amount it can earn, and the time frame.
- For savings accounts, the number of compounding periods is an important determinant as well.
- Inflation has a negative impact on the time value of money because your purchasing power decreases as prices rise.
The time value of money or time value of money exists that the value of money will change over time. 1 baht received today will be worth more than 1 baht in the future because 1 baht received can be invested. Generate returns from today While future money will lose such an opportunity, the real value of money may also be eroded by inflation. Thus, the real value of the same amount of money in the future is not equal to the real value of money today.
Generally, the return on deposits or investments is in the form of interest rates. The factors that determine the value of money are: Duration and interest rate.
