Explain the time value of moneySolutionA fundamental idea in

Explain the time value of money

Solution

A fundamental idea in finance that money that one has now is worth more than money one will receive in the future.Because money can earn interest or be invested, it is worth more to an economic actor if it is available immediately.This concept applies to many contracts; for example, a trade in which payment is delayed will often requirecompensation for the time value of money. This concept may be thought of as a financial application of the saying,\"A bird in the hand is worth two in the bush.\"The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.

The time value of money is money\'s potential to grow in value over time.Because of this potential, money that\'s available in the present is considered more valuable than the same amount in the future.