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Time-value of money

Time-value of money Definition

Time-value of money is the common description for the general rule that cash in hand today is worth more than the same amount of cash in the future. The concept of the time-value of money is used for investment decisions.

Two factors typically contribute to the time-value of money.

  • In a period of inflation, cash will have lower purchasing power in the future.
  • The cash could always be invested in a risk-free alternative instead of the investment under consideration. The interest that you would receive from the risk-free choice is a baseline. Any other investment must be compared against that baseline.

The time-value of money is often expressed as an interest rate or a hurdle rate. The investment must earn money at better than the hurdle rate or it should be rejected.

Additional meaning of Time-value of money:

The time value of money (TVM) or the present discounted value is one of the basic concepts of finance. We know that if we deposit money in a bank account we will receive interest. Because of this, we prefer to receive money today rather than the same amount in the future. Money we receive today is more valuable to us than money received in the future by the amount of interest we can earn with the money. This is referred to as the time value or cash value of money. It is the change in purchasing power of money over time.

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