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Time Value of Money
Time Value of Money
‘A bird in hand is worth two in the bush’ – this adage applies to financial transactions too.
Say, someone borrowed a certain amount from you and it is due. Just as you are expecting the
money to be credited to your account, you get a call from the borrower saying that he will
pay you after 3 months. You are not happy about this. This is because you are aware of time
value of money or TVM, albeit subconsciously. In this article, we will discuss the concept of
time value of money, also called as present value through the following topics.
FV = PV x [ 1 + (I/ N) ] (N*T)
Where,
FV is Future value of money,
PV is Present value of money,
I is the interest rate,
N is the number of compounding periods annually and
T is the number of years in the tenure.
For instance, if you invest Rs. 1 lakh for 5 years at 10% interest, the future value of this one
lakh will be Rs. 161,051 as per the formula. This formula can help you to analyze different
investments over different time periods, enabling you to make optimal and informed financial
decisions.