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

see DISCOUNTED CASH FLOW.
References in periodicals archive ?
It is entirely possible that a situation that results in an overall tax savings could have a net tax cost when the time value of money is considered.
The nominal average calculations makes both leases equal, but not when the time value of money is factored in.
We can also use our time value of money spreadsheet formula to arrive at the effective interest.
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Although this method recognizes income during the life of the policy, it does not take into account the time value of money.
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The "time value of money" theory will only make this problem harder to fix, the longer we wait.
Consequently, the time value of money places a much higher premium on the initial installed cost than originally expected.
For example, only properties acquired after 1986 are eligible under the IRS ruling, and owners who plan on disposing of their properties in the short-term will not benefit, as the savings are based solely on the time value of money and the benefit could be re-captured upon sale.
This hypothetical example is based on "undiscounted totals--that is, there is no "time value of money" element to the costs.
The many reasons for this are discussed below and include tax factors, with time value of money considerations and tax-free trading and non-tax factors, such as cash flow considerations and record keeping and reporting requirements.
Tax Executives Institute believes that the interest rate provisions of the tax law should be designed to recompense a party for the time value of money -- nothing more and nothing less.