Week 2 Project

Time Value of Money

Time value of money is a key concept in �nance. In essence, time value of money is the recognition that a dollar today and a dollar at some time in the future do not have the same worth at this moment in time. In short, time is money.

Most of us want more of things now rather than later. You have heard the expression “time is money.” What is the meaning of this? Economists call this concept a positive time preference—we prefer things now as opposed to later. This preference gives rise to the concept of time value of money (TVM).

A positive time preference in�uences the value of money today versus the value of money tomorrow. Because we prefer money now, we want to be compensated for waiting until tomorrow.

We tend to value things less that are in the future, relative to things that might happen in a short time period. In other words, we discount the future. Furthermore, the time value of money also represents the cost of using money and the money itself. Will Rodgers, a famous entertainer in the 1930s during the Great Depression, said he wasn’t worried about the return on his money, so much as the return of his money.

The main elements of time value of money are money (cash), interest, and time. The formula or equation for present value and future value for either a lump sum or an annuity contains mathematical operations: addition, multiplication, and exponents.