Time Value of Money

What is time value of money?

Time value of money is an important concept used in finance to understand the relationship between time and money. It states that a rupee today will have more value than a rupee tomorrow due to inflation and other factors. Economic decisions are heavily influenced by this principle as it helps us better understand investments and future financial goals.

How to calculate time value of money?

To calculate the time value of money, you need to know the following information:

1. The present value of the money: This is the current value of the money that you have.
2. The future value of the money: This is the value that the money is expected to have at a future point in time.
3. The interest rate: This is the rate at which the money is expected to earn interest over the period of time.
4. The length of time: This is the amount of time that the money is expected to be invested for.

Time value money formula

The formula for calculating the time value of money is:

Future Value = Present Value x (1 + Interest Rate)^Time

For example, if you have INR 1,000 today, and you expect it to earn an interest rate of 5% per year for a period of 5 years, the future value of the money would be calculated as follows:

Future Value = 1,000 x (1 + 0.05)^5
Future Value = 1,276.28

Therefore, the future value of the money would be INR 1,276.28.