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Time Value of Money (TVM): Definition, Concept, WACC – A Guide

Hello, What is the time value of money definition? It is the value of time, this wealth is a concept, which also recognizes the relevant value of future cash flows arising as a result of financial decisions given the opportunity cost of money.

What is the time value of money concept?

Money loses its value over time. Which makes it still more desirable than the latter. There are many reasons why money loses over time. Most obviously, there is inflation that reduces the purchasing power of money.

But this will often, more than likely be the loss in real value due to inflation, rather than the cost of acquiring future funds. The opportunity cost of not having money right now includes the loss of additional income, which you could have previously earned only by obtaining cash.

Furthermore, instead of receiving money in the future, there may be some risk and uncertainty now. For these reasons, future cash flows are lower than the current cash flows. The time value of currency value attempts to incorporate the above considerations into financial decisions by converting them to present value or future value equivalents to facilitate an objective assessment of cash flows from different time periods. This ensures a comparison of ‘like with like’.

Also read: Finance Manager’s work Responsibility, Description Resume Updated.

The Weighted Average Cost of Capital – WACC

The current or future value of this cash flow is calculated using a discount rate (also known as capital, WACC, and required rate of return.), Which is determined based on several factors is.

Interest rates demand a higher return on investment due to the higher interest rates on deposits and debt securities, loss of interest income on future cash flows.

Risk premium Greater risk is associated with future cash flows of an investment, the higher the rate of return required by investors to compensate for the additional risk. The higher the rate of inflation, the higher the rate of return that investors will need on their investment.

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