- Time value of money is the premise that an investor prefers to receive a payment of a fixed amount of money today, rather thatn an equal amount in the future, all else being equal.
Time value of money
- which would you rather have? RM 1,000 today or RM 1,000 after 5 years?
- Money received sooner rather thatn later allows one to use the funds for investment or consumption purposes
- all other factors being equal, it is better to have RM 1,000 today.
- simply put this is the concept of the time value of money
Importance of time factor
- why is TIME such an important element in your decision?
- time allows one the opportunity to postpone consumption and earn INTEREST
Calculation based on the time value of money
- Present value ( PV ) of an amount that will be received in the future.
- Future value ( FV ) of an amount invested ( such as in a deposit account ) now at a given rate of interest
Formulas
Present Value of Future Sum
PV = FV / ( 1 + r ) n
Future Value Of Present Sum
FV = PV x ( 1 + r )n
Notation
PV = present value is the value at time = 0
FV = future value is the value at time = n
r = rate at which the mount will be compounded each period
n = number of periods
Benefit Of The Knowledge Of The Time Value Of Money
- for investment analysis - to describe the financial benefit of projects
- to compare investment alternative
- to analyze how time impacts business activities such as loans, mortgages, leases, saving and annuities.
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