# time value of money concept

So, the equation for calculating the three-year future value of the investment would look like this: Future Value=$10,000×(1+0.045)3\begin{aligned} &\text{Future Value} = \$10,000 \times ( 1 + 0.045 )^3 \\ \end{aligned}Future Value=$10,000×(1+0.045)3. Here is a Complete Free Guide onEquity Linked Saving Scheme (ELSS Funds)- https://www.elearnmarkets.com/pages/elssTime is our greatest asset. Time value of money is a concept but is not an accounting principle. To illustrate, we have provided a timeline: If you are choosing Option A, your future value will be $10,000 plus any interest acquired over the three years. A slightly more calculative rule is the “Rule of 69” which states the doubling period as 0.35 + 69/Interest The above calculation, then, is equivalent to the following equation: Future Value=$10,000×(1+0.045)×(1+0.045)\begin{aligned} &\text{Future Value} = \$10,000 \times ( 1 + 0.045 ) \times ( 1 + 0.045 ) \\ \end{aligned}Future Value=$10,000×(1+0.045)×(1+0.045). You could find the future value of $15,000, but since we are always living in the present, let's find the present value of $18,000. If you received $10,000 today, its present value would, of course, be $10,000 because the present value is what your investment gives you now if you were to spend it today. Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings. From the above calculation, we now know our choice today is between opting for $15,000 or $15,386.48. The time value of money (TVM) is an important concept to investors because a dollar on hand today is worth more than a dollar promised in the future. The underlying principle is that the value of $1 that you have in your hand today is greater than a dollar you will receive in the future. This is due to the potential the current money has to earn more money. For most of us, taking the money in the present is just plain instinctive. Problem: You have decided to buy a car, the price of the car is $18,000. Given some expected interest rate and when you do that you can compare this money to equal amounts of money at some future date. if the interest is 8%, the doubling period is 9 years [72/8=9 years]. Interest is charge against use of money paid by the borrower to the lender in addition to the actual money lent. This time, we'll assume interest rates are currently 4%. Basically the Conventional Time value of money results from the concept of interest that prohibited in Islamic principle. The concept and its implication on the accounting transaction should be understood. The time value of money recognizes that receiving cash today is more valuable than receiving cash in the future. Time Value of Money is a concept that recognizes the relevant worth of future cash flows arising as a result of financial decisions by considering the opportunity cost of funds. The two concepts of the time value of money are explained below: #1. Let us understand why we prefer it today. Or another way to think about it is, think about what the value of this money is over time. The car dealer presents you with two choices: (A) Purchase the car for cash and receive $2000 instant cash rebate – your out of pocket expense is $16,000 today. What is Interest? To calculate the present value, or the amount that we would have to invest today, you must subtract the (hypothetical) accumulated interest from the $10,000. It impacts consumer finance, business finance, and government finance. In this case, the future value after five years can be quickly calculated using the basic simple interest formula PNR/100. We arrive at this sum by multiplying the principal amount of $10,000 by the interest rate of 4.5% and then adding the interest gained to the principal amount: $10,000×0.045=$450\begin{aligned} &\$10,000 \times 0.045 = \$450 \\ \end{aligned}$10,000×0.045=$450, $450+$10,000=$10,450\begin{aligned} &\$450 + \$10,000 = \$10,450 \\ \end{aligned}$450+$10,000=$10,450. In other words, money received in the future is not worth as much as an equal amount received today. The amount of interest depends on whether there is simple interest or compound interest. Your account would grow to $1,000 (=$909.1 × (1 + 10%)) by the end of first year. However, we don't need to keep on calculating the future value after the first year, then the second year, then the third year, and so on. It's done with the equation: FV=PV×(1+i)nwhere:FV=Future valuePV=Present value (original amount of money)i=Interest rate per periodn=Number of periods\begin{aligned} &\text{FV} = \text{PV} \times ( 1 + i )^ n \\ &\textbf{where:} \\ &\text{FV} = \text{Future value} \\ &\text{PV} = \text{Present value (original amount of money)} \\ &i = \text{Interest rate per period} \\ &n = \text{Number of periods} \\ \end{aligned}FV=PV×(1+i)nwhere:FV=Future valuePV=Present value (original amount of money)i=Interest rate per periodn=Number of periods. Let's up the ante on our offer. The present value of annuity further depends on whether it is an (ordinary) annuity or an annuity due. So the present value of a future payment of $10,000 is worth $8,762.97 today if interest rates are 4.5% per year. Application of time value of money principle. You can figure it all at once, so to speak. Another reason is that when a person opts to receive a sum of money in future rather than today, he is effectively lending the money and there are risks involved in lending such as default risk and inflation. (For related reading, see "Time Value of Money and the Dollar"). Time value of money is a concept to understand the value of cash flows occurred at a different point of time. The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. What is the Time Value of Money? How to decide? In essence, all you are doing is rearranging the future value equation above so that you may solve for present value (PV). Say you could receive either $15,000 today or $18,000 in four years. 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