Tuesday, July 27, 2010
Time Value of Money (TVM)
What Does Time Value of Money (TVM) Mean?
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
Also referred to as "present discounted value".
Understanding The Time Value Of Money - Investopedia Videos
click the link above to understand more in video
Everyone knows that money deposited in a savings account will earn interest. Because of this universal fact, we would prefer to receive money today rather than the same amount in the future.
For example, assuming a 5% interest rate, RM100 invested today will be worth RM105 in one year (RM100 multiplied by 1.05). Conversely, RM100 received one year from now is only worth RM95.24 today (RM100 divided by 1.05), assuming a 5% interest rate.