Gayle M. Doria
Prof. Khen Enriquez
This article will explain the financial concept of time value of money. The overview provides an introduction to the principles at work when money grows in value over time. These principles include future value of money, present value of money, simple interest and compound interest. In addition, other concepts that relate to factors that can impede the growth in value of money over time are explained, including risk, inflation and accessibility of assets. Basic formulas and tables have been provided to assist in calculating various formulations of time value of money problems. Explanations of common financial dealings in which the time value of money is an important consideration, such as annuities, loan amortization and tax deferral options, are included to help illustrate the concept of the time value of money in everyday life. The time value of money is a fundamental financial principle. Its basic premise is that money gains value over time. As a result, a dollar saved today will be worth more in the future, and a dollar paid today costs more than a dollar paid later in time. The reason for the increasing value in money over time is that money can be invested to earn interest, and the gain in interest can be significant over time. This is also why a dollar paid today costs more than a dollar paid in the future. Money expended today cannot be invested for the future and thus the loss is essentially two-fold -- the money is spent on the payment and any earning potential it could have had in an investment vehicle is forgone. The concept of time value of money is an important consideration in any long-term, and even short-term, investment or financial obligation. Financial managers and advisers frequently use time value of money formulas to determine the true costs of various investment opportunities. In addition, people consider the time value of money concept-perhaps without even realizing it-in making common...
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