Time Value of Money



Time Value of Money

Time value of money is the one of most important concept in terms of investment decisions, mainly because of inflation. The notion that money has a time value is one of the fundamental concepts in finance. The concept of value of money over time indicates that a unit of money today is worth more than one unit of money in the future. This is because money today can be invested and interest can be earned which ultimately increases the value of money. Interest is the cost paid for the use of money for a period of time and expressed as a percentage rate.

The concept of change in time value of money plays a central role in the practice of financial calculations and expresses the need to consider the time factor in the implementation of long-term financial operations by assessing and comparing the value of money at the beginning of the project financing and when they return in the form of future cash flows (FinanceProfessor.com, n.d.). Thus, the same amount of money at different times have different costs, the cost of money at the present time is always higher than that in any future period. This disparity is generally governed by three main factors: inflation, the risk of non-receipt of income from capital investment and the characteristics of money, considered as one of the types of current assets.

It is known that inflationary pressures are inherent in any economy, because of depreciation of money. This means that the currency has more value today than tomorrow. This situation determines the desire to invest money in order to at least get a return that covers the inflationary losses. In any financial transaction, there is a risk of no return of funds invested and (or) non-receipt of income. This risk arises from the fact that any agreement under which the receipt of money expected in the future is likely to be unfulfilled or fulfilled not in full (Uwf.edu, n.d.). Unfortunately, perhaps, each member business can recall specific examples, including from personal experience related to the expected in the future, but has lost income. For example, a situation familiar to many: regular customer and a partner who has been granted substantial delay in payment, has not fulfilled its obligations to the supplier due to the fact that the bankrupt, although at the time of delivery there were no signs of such a result.

Considering the money as one of the types of assets, it should be noted their main feature - any asset should generate a profit, it follows that the amount estimated to be received in the future should be clearly higher than the amount invested in real time. The concept of time value of money is crucial due to the fact that financial decisions involve evaluation and comparison of cash flows, carried out in different time periods.

Money has a time value. It means that if a person has a dollar in possession is preferred over a ...