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 ?
Nor should fees for services be treated as interest equivalents unless they are part of a financing arrangement in which the taxpayer's payments reflect the time value of money or the use or forbearance of money.
As stated at the beginning of this column, it is sometimes necessary to consider the time value of money when making investment decisions.
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.
Further, if the estate or beneficiaries do not dispose of the bonds in the near future, the election accelerates the income tax due; therefore, the time value of money of that tax must be considered.
The proposal's goal is to increase depreciation deductions to account for inflation and the time value of money.
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