Time value of Money

Posted in Finance, Accounting and Economics Terms, Total Reads: 852
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Definition: Time value of Money

This concept explains the difference in value of a sum of money flowing in future when viewed from the present date. It establishes a mathematical relation between the present value and the future value. It also states that the value of money decreases compounding when calculated in terms of present value.

This compounding rate is also known as the discounting rate . It is defined by the rate   by which money depreciates on a yearly basis.

Example

If a sum of Rs 1000 is received after one year . The value of  that payment when  calculated  today onwards would  calculate the sum of Rs 1000 as

Formula used

PV= FV/ (1+I)N

PV = 1000*10 /11

 = 909 Rs

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