Question

What is meant by the Time Value of Money?

Hint:

Remember: Time Value of Money means money today is worth more than the same amount tomorrow because it can earn interest. TVM is the foundation of finance - used in investing, borrowing, and valuation decisions.

Answer 1

Step 1: Understanding the Concept:
Time Value of Money (TVM) is a core financial principle that accounts for the opportunity cost of money over time.
Step 2: Detailed Explanation:
1. Inflation: Prices generally rise over time, so 100 rupees can buy more today than it can a year from now.
2. Earning Potential: Money held today can be invested to earn interest or dividends, growing into a larger sum.
3. Risk: Receiving money now is a certainty, while receiving it in the future carries the risk that the payer might default.
Because of these reasons, a rational investor prefers money today over the same amount later.
Step 3: Final Answer:
TVM means that money has a time-dependent value due to its potential earning capacity and the impact of inflation.