Time Value of Money (TVM)
Time Value of Money (TVM) is a concept that states that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This concept is based on the idea that money can earn interest, so the sooner it is invested, the more it can earn. The time value of money is used to compare investments and to determine the value of cash flows at different points in time. It is an important concept in financial decision-making.
History of Time Value of Money
The concept of time value of money dates back to the 16th century, when Italian mathematician Luca Pacioli wrote about the concept of compound interest. The idea was further developed by French mathematician and philosopher Blaise Pascal in the 17th century. In the 19th century, German mathematician Carl Friedrich Gauss developed the concept of present value, which is the basis of the time value of money.
Table of Comparisons
| Time Period | Amount Invested | Interest Rate | Total Value |
|---|---|---|---|
| 1 Year | $1,000 | 5% | $1,050 |
| 2 Years | $1,000 | 5% | $1,102.50 |
| 3 Years | $1,000 | 5% | $1,157.63 |
Summary
Time Value of Money (TVM) is a concept that states that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This concept is based on the idea that money can earn interest, so the sooner it is invested, the more it can earn. The time value of money is used to compare investments and to determine the value of cash flows at different points in time. It is an important concept in financial decision-making and has been around since the 16th century. For more information on the time value of money, visit Investopedia, The Balance, or Investing Answers.
See Also
- Compound Interest
- Present Value
- Future Value
- Discount Rate
- Net Present Value
- Internal Rate of Return
- Annuity
- Cash Flow
- Inflation
- Risk-Free Rate
