What is time value of money? Discuss its relevance in financial decision making

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 to its earnings potential in the interim. The time value of money is a core principle of finance. A sum of money in the hand has greater value than the same sum to be paid in the future. The time value of money is also referred to as the present discounted value.

Investors prefer to receive 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 a savings account earns interest. Over time, the interest is added to 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 lose the additional money it could have earned over that time if invested. It will have even less buying power when you retrieve it because inflation reduces its value.

As another example, say you have the option of receiving $10,000 now or $10,000 two years from now. Despite the equal face value, $10,000 today has more value and utility than it will two years from now due to the opportunity costs associated with the delay. In other words, a delayed payment is a missed opportunity.

The time value of money has a negative relationship with inflation. Remember that inflation is an increase in the prices of goods and services. As such, the value of a single dollar goes down when prices rise, which means you can't purchase as much as you were able to in the past.

The most fundamental formula for the time value of money takes into account the following: the future value of money, the present value of money, the interest rate, the number of compounding periods per year, and the number of years.

Based on these variables, the formula for TVM is:

egin{aligned}&FV = PV Big ( 1 + frac {i}{n} Big ) ^ {n imes t} \& extbf{where:} \&FV = ext{Future value of money} \&PV = ext{Present value of money} \&i = ext{Interest rate} \&n = ext{Number of compounding periods per year} \&t = ext{Number of years}end{aligned}​FV=PV(1+ni​)n×twhere:FV=Future value of moneyPV=Present value of moneyi=Interest raten=Number of compounding periods per yeart=Number of years​

Keep in mind, though that the TVM formula may change slightly depending on the situation. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or fewer factors.

Time value of money in financial management decision making:--

Role of a Company Secretary in management of financial instruments

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