Time Value of Money (TVM)
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
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