Time Value of Money
The term ‘Time Value of Money (TVM)’ implies that there is a connection between ‘time’ and ‘value of money’. This concept can be explained by a simple question - Would you prefer to receive $100 today or after a year? The answer shall always be obviously ‘today’. Let us understand why we prefer it today. If you receive $100 now, you can deposit it in a bank at say 10% interest rate, value of your money after a year will be $110. On the other hand, if you opt to receive money after a year, you will get $100. First option is preferred because after one year, you are better off by $10. In the current example, future value of $100 is $110 or present value of $110 is $100 and $10 is the time value of money for 1 year.