time value of money

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Time value of money

The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

Time Value of Money

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 require compensation 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."

time value of money

The concept that holds that a specific sum of money is more valuable the sooner it is received. Time value of money is dependent not only on the time interval being considered but also the rate of discount used in calculating current or future values.

Time value of money.

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.

For example, if you were given $100 today and invested it at an annual rate of only 1%, it could be worth $101 at the end of one year, which is more than you'd have if you received $100 at that point.

In addition, because of money's potential to increase in value over time, you can use the time value of money to calculate how much you need to invest now to meet a certain future goal. Many financial websites and personal investment handbooks help you calculate these amounts based on different interest rates.

Inflation has the reverse effect on the time value of money. Because of the constant decline in the purchasing power of money, an uninvested dollar is worth more in the present than the same uninvested dollar will be in the future.

time value of money

References in periodicals archive ?
We set the opportunity cost of going to college equal to the present discounted value of the wage earnings of a high school graduate that she would have earned by working for four years instead of going to college.
In summary, in the model, the rigid expected present discounted value of wages in newly formed matches amplifies the response of firm's surplus to productivity shocks.
In words, (12) states that along optimal paths (for interior solutions, 0 < R < J) the marginal loss of utility (in terms of leisure) as a result of putting retirement one period off must equal the marginal gain of utility (in terms of lifetime consumption) as the sum of present discounted value labor income is increased.
Wealth is therefore equal to the present discounted value of future per capita GDP plus the present discounted value of the idiosyncratic component of wages.
Further, solving this differential equation for the marginal revenue of human capital in terms of the present discounted value of the expected future rental rate of human capital yields:
Similarly, the value of corporate equity depends on the present discounted value of the expected dividend stream accruing to the owner of the equity.
UR1812 is the rate for 18-year-olds with 12 years of education); the PDV terms measure the present discounted value, from the point of view of a worker of age 18, of earnings of workers with the stated level of education; and the WW terms equal weekly wages for workers of the stated age and education.
An individual will quit his/her job if tie expected present discounted value of the current job is less than the expected present discounted value of the next best alternative, net of moving costs.
It also provides a very useful chapter on basic concepts that recur throughot the textbook, such as present discounted value, expected value, risk aversion, and the distinction between "real" and "nominal.
A debt overhang problem arises when the expected present discounted value of potential future resource transfers from a debtor country is less than its current debt stock.
The median household would have saved $160 per month over the remaining life of the loan, and the total present discounted value of the forgone savings was approximately $11,500.
The average state marginal tax cost of a layoff to employers (the present discounted value of benefits paid back in future higher taxes) is 54 percent of the benefits paid to a firm's employees.