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Time Value of Money (TVM) Important: Why, With Examples – A Guide

Hello, Why is time value for money important? Time value of money is a concept for all parts of the business. A business does not want to know what today’s investment is, it wants to know the total value of the investment. What is the total investment value? Let’s look at one or two examples. Suppose you are one of the lucky ones to win the lottery. You are given two options on how to get the funds.

Example Option

  • Option 1: Take Rs 5,00000 now.
  • Option 2: Pay Rs 6,00000 every year for the next 10 years.

Option 1: You get Rs 5,000,000 and in option 2 you get Rs 6,000,000. Option 2 may seem like a better bet because you get an additional Rs 1,000,000, but the time value of the currency theory says that since some money is paid in the future, it is worthless.

Option 2: Today is worth it (through the process of getting a discount), you can compare an apple to apple between two options. If option 2 is worth less than $ 5,000,000 today, you should choose option 1, or vice versa.

Let’s look at another example: Suppose you go to the bank and deposit $ 100. Bank 1 says that if you promise not to withdraw money for 5 years, they will pay you an interest rate of 5% a year. Before signing up, consider that there is a cost to you for not reaching your money for 5 years. At the end of 5 years, Bank 1 will refund you $ 128.

But you also know that you can go to bank 2 and get 6% interest rate, so your money is actually equal to 6% every year, which you do not have to be given by banks 1 and 2 Using two different interest rates, converting our current cash to future value, we see that putting our money in bank 1 will give us a profit of about $ 128 over 5 years, while bank 2 is an interest. Provides the rate. $ 134. Between these two options, Bank 2 is the better deal to maximize future value.

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