Time value of money là gì

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Jason Fernando is a professional investor & writer who enjoys tackling and communicating complex business and financial problems.

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David Kindness is an accounting, tax and finance expert. He has helped individuals & companies worth tens of millions khổng lồ achieve sầu greater financial success.

What Is the Time Value of Money (TVM)?

The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due lớn its earnings potential in the interyên.

This is a core principle of finance. A sum of money in the h& has greater value than the same sum lớn be paid in the future.

Time value of money means that a sum of money is worth more now than the same sum of money in the future.This is because money can grow only through investing. An investment delayed is an opportunity lost.The formula for computing the time value of money considers the amount of money, its future value, the amount it can earn, and the time frame.For savings accounts, the number of compounding periods is an important determinant as well.

Understanding the Time Value of Money (TVM)

Investors prefer lớn receive sầu money today rather than the same amount of money in the future because a sum of money, once invested, grows over time. For example, money deposited into lớn a savings account earns interest. Over time, the interest is added khổng lồ the principal, earning more interest. That"s the power of compounding interest.

If it is not invested, the value of the money erodes over time. If you hide $1,000 in a mattress for three years, you will thất bại the additional money it could have sầu earned over that time if invested. It will have even less buying power when you retrieve it because inflation has reduced its value.

As another example, say you have sầu the optionof receiving $10,000 now or $10,000 two years from now. Despite the equal face value, $10,000 today has more value & utility than it will two years from now due khổng lồ the opportunity costs associated with the delay.

Formula for Time Value of Money

Depending on the exact situation, the formula for the time value of money may change slightly. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or fewer factors. But in general, the most fundamental TVM formula takes into tài khoản the following variables:

FV = Future value of moneyPV = Present value of moneyi = interest raten = number of compounding periods per yeart = number of years

Time Value of Money Examples

Assume a sum of $10,000 is invested for one year at 10% interest compounded annually. The future value of that money is:

The formula can also be rearranged khổng lồ find the value of the future sum in present day dollars. For example, the present day dollar amount compounded annually at 7% interest that would be worth $5,000 one year from today is:

Effect of Compounding Periods on Future Value

The number of compounding periods has a dramatic effect on the TVM calculations. Taking the $10,000 example above, if the number of compounding periods is increased lớn quarterly, monthly, or daily, the ending future value calculations are:

Quarterly Compounding: FV = $10,000 x <1 + (10% / 4)> ^ (4 x 1) = $11,038Monthly Compounding: FV = $10,000 x <1 + (10% / 12)> ^ (12 x 1) = $11,047Daily Compounding: FV = $10,000 x <1 + (10% / 365)> ^ (365 x 1) = $11,052

This shows TVM depends not only on interest rate and time horizon, but also onhow many times the compounding calculations are computed each year.

Opportunity cost is key to the concept of the time value of money. Money can grow only if it is invested over time & earns a positive return.

Money that is not invested loses value over time. Therefore, a sum of money that is expected to be paid in the future, no matter how confidently it is expected, is losing value in the meantime.

The concept of the time value of money can help guide investment decisions.

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For instance, suppose an investor can choose between two projects: Project A và Project B. They are identical except that Project A promises a $1 million cash payout in year one, whereas Project B offers a $1 million cash payout in year five sầu.

The payouts are not equal. The $1 million payout received after one year has a higher present value than the $1 million payout after five years.

it would be hard khổng lồ find a single area of finance where the time value of money does not influence the decision-making process.

The time value of money is the central concept in discounted cashflow analysis (DCF), which is one of the most popular và influential methods for valuing investment opportunities.

It is also an integral part of financial planning & risk management activities. Pension fund managers, for instance, consider the time value of money khổng lồ ensure that their tài khoản holders will receive adequate funds in retirement.

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Related Terms

Present Value of an Annuity Definition
The present value of an annuity is the current value of future payments from that annuity, given a specified rate of return or discount rate.
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What Is the Paybachồng Period?
The paybaông xã period refers lớn the amount of time it takes to recover the cost of an investment or how long it takes for an investor to lớn hit breakeven.
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Delayed Perpetuity
Delayed perpetuity is a perpetual stream of cash flows that start at a predetermined date in the future.
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Future Value (FV)
Future value (FV) is the value of a current asmix at a future date based on an assumed rate of growth over time.
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What Is Cumulative Interest?
Cumulative interest is the sum of all interest payments made on a loan over a certain time period.
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Continuous Compounding
Continuous compounding is the process of calculating interest and reinvesting it inkhổng lồ an account"s balance over an infinite number of periods.

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