Time Value of Money

Time Value of Money

See Also:
Valuation Methods
Adjusted Present Value (AVP)
Net Present Value Method
Internal Rate of Return Method
Required Rate of Return

Time Value of Money (TVM)

Time value of money is the difference between an amount of money in the present and that same amount of money in the future. Having money now is more valuable than having money later.
The present amount is called the present value, the future amount is called the future value, and the appropriate rate that relates the two amounts is called the discount rate.
Present Value = Future Value / (1 + Discount Rate)
Future Value = Present Value x (1 + Discount Rate)

Time Value of Money Examples

Now, let’s look at time value of money examples. If you invest $100 (the present value) for 1 year at a 5% interest rate (the discount rate), then at the end of the year, you would have $105 (the future value). So, according to this example, $100 today is worth $105 a year from today.
$105 = $100 x 1.05
$100 = $105 / 1.05
Likewise, $100 a year from today, discounted back at 5%, is worth only $95.24 today.
$95.24 = $100 / 1.05

To calculate the time value of money for a period longer than one year, you simply raise the discount factor by the appropriate number of time periods. For example, to calculate the future value of $100 at 5% for 5 years:
$127.63 = $100 x (1.05)5
For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

time value of money, Time Value of Money Examples
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]time value of money, Time Value of Money Examples


Related Blogs
Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »
Near Sourcing vs. Outsourcing: The Key to Cost-Effective Accounting Solutions

In this insightful interview, Dan sheds light on the critical role of accounting in business growth and success. Uncover the common pitfalls business owners face when overlooking accounting and how it can hinder access to loans and financial opportunities. Learn why good financial statements are vital for decision-making and attracting investors. With the NearSourcing model,

Read More »
Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »
WIKI CFO® - Browse hundreds of articles
Skip to content