Time Value of Money
Time value is a finance concept which takes into consideration the worth of an amount of funds or money today in respect to the worth of the funds or money in future when the money is invested at an interest rate for the period. Time value for money is the basis of most finance decisions are made ranging from sourcing of funds and utilization of the funds in investment projects.
Analysis Of Time Value Of Money
Time value of money as a measure is the interest rate charged on an amount or sum of money invested between time period zero and time period one through to time period “n”, time period “n” being the number of periods (years, months) the invested amount will give returns to the investor. The amount invested today will be worth more by the value of the interest rate in the future period.
Example For Time Value Of Money
If one hundred dollars are invested by Mike at ten percent per annum for one year, how much money will Mike have at the end of year one?
Solution; At the end of period one Mike will have US dollar one hundred and ten calculated as follows;
Initial sum : US dollar 100
Interest amount 10% × 100 : US dollar + 10
US dollar 110
Mike, the investor will have 110 US at the end of the year if he has and invests US dollar 100 today.
It is a general conclusion therefore that any rational investor will prefer to have US dollar 100 today rather than at the end of the year so that they can invest the US dollar 100 at 10% interest rate per annum and have US dollar 110 at the end of the year.
Time value considers the worth of invested funds today in respect to the worth of the funds in future. We offer time value of money homework help & assignment help for finance students.