Money Value Of Time Calculator
If you have never heard of the value of money (TVM) concept before, it is an important one to understand.
What is TVM?
There is only one place to begin, and this is by explaining what the TVM theory actually is. This is the theory that the funds you have at this present term are worth greater than the same sum at a later date, as a consequence of the possible earning capacity of the value.
This core financial principle holds that provided your value is able to earn interest, any amount of the value is worth more the sooner you receive it. However, TVM is referred to as a present discounted value.
The idea behind TVM is that investors prefer to get a hold on funds today instead of the same quantity of TMV at a later date, as they will then have the potential to grow the value over a specified period of term.
Let’s take a look at an example to give you a better understanding. You are presented with two options:
You can receive $20,000 off your parents today to put toward a future home
You can receive $20,000 at the period you’re ready to purchase the property, which you estimate will be in approximately three years
On the surface, you may assume that there is no real difference between the two options; $20,000 is $20,000, right? Well, under the TVM concept, this is not really the case. As per TVM, it would make more sense to receive the value today so long as you can earn from that 20k, or in other words opportunity costs.
What is the Equation?
The TMV formula can change a little bit depending on your exact situation.
The formula for TVM is as follows:
FV = PV x [ 1 + (i / n) ] (n x t)
In this formula, the letters represent the following:
- ‘FV’ represents the future value, which is what you are aiming to figure out with this equation.
- ‘PV’ represents the current value. In the example above, this would be $20,000.
- ‘i’ represents the interest rate.
- ‘n’ represents the number of compounding periods per annum.
- ‘t’ represents the number of years. In the example above, this would be three.
By using this formula, you will be able to determine how much a sum of the value you have right now is going to be worth at a later date. This can be incredibly useful when it comes to financial planning.
Why is TMV Important?
Now that you have a better understanding of this concept, you will probably want to know why it matters. Why should you care?
TMV is beneficial because it can help to guide any investment decisions you make in the future. For example, let’s say that you have the option of choosing between two different investment projects.
Both projects may have identical descriptions, with only one difference. With the first project, you will get a payout of $35,000 within the first year. However, with project B, you will get the same payout, yet in year five.
If you don’t anticipate needing the value within the next five years, you may see no real difference between the two. However, by using the TVM concept, you can determine whether project A is a lot more lucrative.
Time Value of Money TVM