The Time Value of Money (TVM) means money today is worth more than the same amount in the future because it can be invested and grow. Future Value (FV) shows how much money today will be worth in the future with interest, while Net Present Value (NPV) tells us how much future money is worth today. These concepts help in making smart investment decisions, financial planning, and understanding the impact of inflation on money.
The Time Value of Money means money today is worth more than in the future, with Future Value showing its growth over time and Net Present Value determining its present worth, helping in smarter financial decisions.
समयको मूल्य (Time Value of Money) को अर्थ भनेको आजको पैसा भविष्यको भन्दा बढी मूल्यवान् हुन्छ, जहाँ भविष्यको मूल्य (Future Value)ले त्यसको समयसँगै वृद्धि देखाउँछ र शुद्ध वर्तमान मूल्य (Net Present Value) ले त्यसको आजको मूल्य निर्धारण गर्छ, जसले वित्तीय निर्णयहरूलाई सहज बनाउँछ।
Time Value of Money (TVM)
The Time Value of Money (TVM) is the idea that money today is worth more than the same amount in the future. This is because money can earn interest, be invested, or lose value due to inflation.
Example for Layman Understanding:
Imagine you have $100 today. If you deposit it in a bank that offers 5% annual interest, next year it will grow to $105. The following year, it will be $110.25.
Now, if someone promises to give you $100 after two years, you should ask: "Is it really worth $100 today?" Since you could invest it and make more money, the value of $100 in two years is less than $100 today.
Future Value (FV)
Future value tells us how much money today will grow to in the future if it is invested.
Example for Layman Understanding:
Suppose you put $1,000 in a bank that gives you 10% interest every year.
After one year, your money becomes $1,100.
After two years, it grows to $1,210.
After three years, it reaches $1,331.
So, the future value of your $1,000 today is $1,331 in three years.
Net Present Value (NPV)
Net Present Value helps us find out how much future money is worth today.
Example for Layman Understanding:
Imagine you will receive $1,000 after three years, but you need money now.
If a bank offers 10% interest, you could deposit some money today and it would grow to $1,000 in three years.
That means the amount you need today is less than $1,000—let’s say around $751.
So, $1,000 in the future is worth only $751 today if you can earn 10% interest.
If someone offers you $800 today instead of $1,000 in three years, you should take it, because $800 today is worth more than $751.
Why Do We Calculate These?
To Make Smart Investments – Businesses use these calculations to decide whether a project is worth the money.
To Plan for the Future – People use these concepts for savings, retirement, and loan decisions.
To Adjust for Inflation – Since money loses value over time, these calculations help compare real value.
To Evaluate Business Profits – Companies use these to estimate how much future cash flows are worth today.
To Make Better Financial Choices – Helps in deciding between taking a lump sum today or waiting for future payments.
