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Time Value of Money Formula:
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The Time Value of Money (TVM) is a fundamental financial concept that states money available today is worth more than the same amount in the future due to its potential earning capacity. This core principle forms the basis for investment analysis, capital budgeting, and financial planning.
The calculator uses the Future Value formula:
Where:
Explanation: The formula calculates how much a present amount will grow over time when invested at a specific interest rate, accounting for compound interest.
Details: Understanding TVM is crucial for making informed investment decisions, retirement planning, loan analysis, and comparing different financial opportunities. It helps investors determine the real value of money over time.
Tips: Enter present value in currency units, interest rate as a percentage (e.g., 5 for 5%), and time period in years. All values must be valid (PV > 0, rate ≥ 0, time ≥ 0).
Q1: What is compound interest?
A: Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods, leading to exponential growth over time.
Q2: How does inflation affect TVM?
A: Inflation reduces the purchasing power of money over time, making future money worth less than present money in real terms. The interest rate should ideally exceed the inflation rate.
Q3: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both principal and accumulated interest, resulting in faster growth.
Q4: How often should interest be compounded?
A: The more frequently interest is compounded (daily, monthly, quarterly), the higher the future value will be. This calculator assumes annual compounding.
Q5: Can TVM be used for discounting future cash flows?
A: Yes, the same principle works in reverse to calculate the present value of future cash flows, which is essential for investment appraisal and bond pricing.