An important concept in finance is time value of money which means that cash received at different times has different values. A dollar today is worth more than the same dollar tomorrow.
Time value of money refers to the fact that the same money return has a higher present value if it is to be received early that it is to be received later.
Time value of money means that the value of a sum of money received today is more than its value received after some time. Conversely, the sum of money received in future is less valuable in the future.
Application of Time Value of Money
- TVM helps to analyze the future investments decisions
- It helps to calculate the future values
- It helps to determine the periodic payments
- Most financial decisions involve costs and benefits that are spread out over time.
- Time value of money allows comparison of cash flows from different periods.
- Banks can use TVM to determine the payments of DPS
- Banks can also use it to determine the rate of interest.
- Borrower can make decisions to identify the sources of financing.