Why the value of money over time (TVM) to assume that today’s dollar is worth more than a dollar tomorrow?


Time value of money, or TVM, suggests that the dollar is currently worth more than a dollar in the future due to variables such as inflation and interest rates. Inflation is the General rise in prices, which means that the value of money depreciates over time due to changes in the General price level.

Changes in the price level is reflected in the interest rate. The interest rate charged to financial institutions for loans (e.g. a mortgage or car loan) to individuals or companies and TVM is taken into account when setting rates.

TVM is also described as discounted cash flow (DCF). FSR is a technique used to determine the present value of a certain amount of money upon receipt at a future date. The interest rate used as discount factor, which can be found using present value (PV) table.

In the PX table shows the discount factors from time 0 (i.e. the current day) and on. Later, after receiving the money, the less value it has, and for $ 1 worth more today than $1 received at a future date. At time 0, the discount factor is equal to 1, and over time, the discount factor decreases. A present-value calculator is used to obtain the value of $1 or any other sums of money in different time periods.

For example, if a person has $ 100 and leaves it in cash rather than invest it cost, $100 is reduced. However, if money deposited in a Savings account, the Bank pays interest, which depending on speed can keep pace with inflation. Therefore, it is best to Deposit money into a Savings account or in an asset that grows in value over time. The PV calculator can be used to determine the amount of money needed in connection with current or future consumption.

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