Time Value of Money


Definition: the Time Value of Money is the finance principle that an amount of money in hand today has different buying power than the same amount of money in the future.
This notion exists because there is an opportunity to earn interest on the money, and because inflation will drive prices up, thus changing the "value" of the money. Not having the opportunity to earn interest on money is called Opportunity Cost.
The TVoM is also the calculated value of this money, figuring in a given amount of interest earned or inflation accrued over a given amount of time.
The concept plays a major role in Net Present Value, Discounted Cash Flow, Annuity calculations and in Cost-Benefit Analysis.


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