Jagannath University

Course name: Financial Economics

Assignment Topic: Time value of money

Group – E
Submitted by: Submitted to:
Barna Akther - B200401022 Tahmina Ahmed
Forhad Ali - B200401024 Assistant professor
Mahfuza Akter Mukti - B200401025 Department of Economics
Ekram Hossain - B200401026 Jagannath University, Dhaka
Md Shahin Islam - B200401027
Samia Akther - B200401028
Nazma Khanom - B200401029
Mahmudul Hasan - B200401030
 An Introduction to Time Value of Money

The time value of money (TVM) is a financial principle that states money is worth more today
than in the future due to its potential to earn interest or grow through investments. This is
because delaying money results in a missed opportunity for growth. The TVM is also known as
the present discounted value.This concept is crucial for financial decisions like investments,
loans, and retirement planning. Because money can grow through investments, it's better to
receive it sooner rather than later. Therefore, a dollar today is worth more than a dollar in the
future.A dollar today can be invested to accumulate to more than a dollar in the future, which
also makes a future dollar worth less than a dollar today. Hence, money has a time value.Time
value of money is the concept that money today is worth more than money tomorrow. That is
because money today can be used, invested, or grown. Therefore, $1 earned today is not the
same as $1 earned one year from now because the money earned today can generate interest,
unrealized gains, or unrealized losses.

Some definitions of Time Value of Money

The time value of money means that money is worth more now than in the future because of its
potential growth and earning power over time. In other words, receiving a dollar today is more
valuable than receiving a dollar in the future.
➢ E A Kolb said that Time value of money refers to the fact the same money return has a
higher present value if it is to be received early than it is to be received later.
➢ Time Value of Money (TVM) is a fundamental financial concept, stating that the current
value of money is higher than its future value, given its potential to earn in the years to
come.
➢ The time value of money (TVM) is a core financial principle that states a sum of money
is worth more now than in the future.

Principle of time value of money

Time value of money is the basic financial concept that holds that today money is worth more
than money tomorrow. That's because money today can be us, invested or grown . Therefore, 1$
earned today is not the same as $1 earned one year from now because,the money earned today
can generate interest , unrealized gains or utilized losses.
Types and examples of time value of money:
1. Present value
2. Future value
3. Inflation
4. Interest rate
Present value: present value refers to the current worth of a future money. It factors in interest
rates to decide how much money today would be needed to geow the future amount. For
example,if you have $100 due one year from today and right discount rate is 5% the present
value would be about $95.23 .
Future value: The future value refers to the amount that a current amount of money grows to over
time with interest. For example,$100 invested today at 5%interest compounded annually will
grow to $110 in 2 years. The $110 is the future value of $100 in 2 years.
Inflation: Inflation lower the purchasing power of money over time. Inflation is the steady rise
in prices for goods and services over time which overseas the purchasing power of a given
currency unit. Inflation makes future dollars worth less than today's dollars.
Interest rate : With computnd interest , interest is figured on the principal amount and any
interest earned. Interest compounds over time. For examples, $100 founded at 5 % compounded
annually for 2 years earns $10 in the first year. In the second year, interest is earned
$100+$10=$110.So you earn 100*5 =$5.50 in the second year. The total amount after 2 years is
$100+$10+$5.50=$115.50

Components of Time Value of Money:

The concept of the Time value of money is shaped and calculated using the terms "Present value"
and "Future Value."The key components TVM include the following:
1. Present Value (PV): The current worth of a future sum of money, discounted at a specific
interest rate.The Formula for PV are as follows:
PV = FV / [1 + (i / n)] (n x t)

Here: “PV” = The amount obtained through the discounting of a future cash flow.
“i" = The Rate of Return used to discount or compound an amount to find its PV
'n' = The number of compounding periods per year.
‘t’ = The total number of years for compounding or discounting.
2. Future Value (FV): The value of a current sum of money at a future date, assuming a
certain interest rate.The Formulae for FV is as follows:
FV = PV x [1 + (i / n)] (n x t)

Here: “FV” = The amount obtained through the compounding of a present cash flow.
“i" = The Rate of Return used to discount or compound an amount to find its FV.
'n' = The number of compounding periods per year.
‘t’ = The total number of years for compounding or discounting

3.Compounding: The process of earning interest on both the initial principal and the accumulated
interest from previous periods, increasing the total amount over time .

4.The rate of interest:The interest rate is the rate of return over the investment's lifetime takes
place ,the time period is the number of installments used to calculate the present value or future
value, as weekly, monthly, quarterly etc.

5.Time Period (t): The duration over which the money is invested or borrowed, usually measured
in years.

6.Cash Flows: The actual amounts of money that are received or paid at different times, which
can be either inflows (income) or outflows (expenses).
7.Discount Rate: The interest rate used to calculate the present value of future cash flows,
reflecting the opportunity cost of capital.

These components work together to assess the value of money over time, influencing investment
decisions, loan structures, and financial planning.
The time value of money (TVM) has several practical applications in finance
and investment. Here are some key applications:

1. Investment Decisions: Evaluating the potential returns of different investment opportunities by

calculating their present and future values.
2. Loan Amortization: Determining monthly payments for loans by applying TVM concepts to
understand how interest accumulates over time.
3. Retirement Planning: Estimating how much needs to be saved today to achieve a desired
retirement income, factoring in investment growth.
4. Valuation of Annuities: Assessing the value of regular cash flows received over time, such as
pensions or structured settlements.
5. Capital Budgeting: Analyzing projects by calculating net present value (NPV) and internal rate
of return (IRR) to determine their profitability.
6. Bond Pricing: Valuing bonds by discounting future interest payments and the principal
repayment back to present value.
7. Real Estate Analysis: Estimating the current value of future cash flows from rental income or
property appreciation.
8. Comparative Analysis: Evaluating financial alternatives by comparing the present values of
different cash flow streams.
These applications highlight the importance of understanding how money's value changes over
time in various financial contexts.

Advantages
The time value of money helps investors make the best financial decisions: the decisions that
will have the most financial returns. Most investors and businesses have many investment
opportunities to choose from; using the time value of money helps equalize these opportunities
based on timing.
One of these is the time value of money, the idea that money should increase over time. One
good way to achieve this is using compound interest, where interest earned on the principal in an
account is put back into the account, where it also earns interest.

Disadvantages
Loss or damage especially to reputation, credit, or finances : detriment. the deal worked to their
disadvantage. 2. a. : an unfavorable, inferior, or prejudicial condition
Factors affecting Time Value of Money
1. Consumption Preference
2. Future Uncertainty
3. Inflation in Economy
4. Investment Opportunity
5. Factors affecting Time Value of Money
6. The following are the various factors that affect the time value of money.
7. Consumption Preference
If the amount of satisfaction is the same, people choose to consume now rather than later. Most
people are willing to forgo their current consumption if they discover they will be able to
consume more in the future.

Future Uncertainty
Future events are never guaranteed. What will occur in the future is unknown and no one can
predict future events accurately. The financial environment of an economy goes through major
changes over time. Therefore, if the present consumption rate is higher, it is preferable to
consume now rather than in the future.

Inflation in Economy
Inflation and money’s purchasing power are related. Money loses some of its purchasing power
over time. Every economy experiences inflation, yet the rate varies from one country to the next.
If there is higher inflation then the required rates of return of investors are higher.the time value
of money has a negative relationship with inflation. The value of the currency goes down when
the general price level rises, which means consumers’ purchasing power declines and the future
value of a sum of money falls.

Investment Opportunity
Reinvestment is a concept that the time value of money takes into account. If an investment
produces a regular cash flow, the periodic return can be reinvested to provide an even higher
return. Whatever the current cash flow may be, if it arrives now, it can be invested to produce
future cash flow
Conclusion:
The time value of money is a fundamental financial concept that emphasizes the importance of
timing in monetary transactions. It highlights that money available today is worth more than the
same amount in the future due to its potential earning capacity. Understanding TVM is crucial
for effective investment decision-making, loan assessments, and overall financial planning. By
considering factors like present value, future value, interest rates, and time periods, individuals
and businesses can make informed choices that maximize their financial outcomes and manage
risks more effectively..

References:
➢ https://testbook.com/ugc-net-commerce /types-of-time-value-of-money
➢ https://www.investopedia.com/ask/answers /033015/why-time-value-money-tvm -
important-concept-investors.asp
➢ https://www.investopedia.com/articles/03 /082703.asp
➢ https://www.headanalysis.com /post/the-power-of-compound -interest-how-time-and -
consistency-can-transform-your -wealth
➢ https://ischoolconnect.com/blog /financial-modelling-course-heres -everything-you-
should-know/