What is Time Value of Money (TVM)?

The Time Value of Money (TVM) is a fundamental concept in finance, and it influences every financial decision we make. It's based on the idea that money available today is worth more than the same amount of money in the future. This is due to the potential earning capacity of money, which can earn interest over time.

There are several key components to understand when discussing TVM:

Present Value (PV): This is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Future Value (FV): This is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

Interest Rate (r): This is the cost of borrowing money or the gain from lending money, usually expressed as a percentage of the amount borrowed/lent.

Number of Periods (n): This is the length of time the money is invested or borrowed for.

The basic formula for TVM is:

FV = PV * (1 + r)^n

This formula allows us to calculate either the future value of an investment, given the present value, the interest rate, and the number of periods, or vice versa.

For example, if you have ₹1000 today and you can earn an interest rate of 5% per year, in one year's time you would have ₹1000 * (1 + 0.05) = ₹1050. This demonstrates that the future value of your money is greater due to the potential earning capacity.


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