Time Value of Money
Student Question
Can you explain the time value of money to me?
Sia Response
Answer
The time value of money (TVM) is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Solution
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a. Definition: The time value of money (TVM) is a financial principle that describes how the value of money changes over time.
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b. Formula for Future Value: The future value (FV) of a single sum of money can be calculated using the formula FV = PV(1 + r)^n where PV is the present value, r is the annual interest rate, and n is the number of years.
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c. Present Value Concept: Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. The formula for calculating PV is PV = FV/((1 + r)^n) where FV is the future value, r is the annual interest rate, and n is the number of years.
Key Concept
Time Value of Money (TVM)
Explanation
TVM is a fundamental financial principle that emphasizes the importance of time in the value of money, illustrating how money's worth changes over time due to its potential earning capacity.
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