Time value of money (TVM)
from class: Principles of Finance Definition Time Value of Money (TVM) is the concept that money available now is worth more than the same amount in the future due to its potential earning capacity. This principle underlines why receiving money today is preferable to receiving it later.
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Predict what's on your test 5 Must Know Facts For Your Next Test The core formula for TVM involves variables such as present value (PV), future value (FV), interest rate (r), and time period (t). Present Value (PV) calculates how much a future sum of money is worth today. Future Value (FV) determines what an amount of money today will be worth in the future, accounting for interest or investment growth. Compounding interest plays a crucial role in TVM, where interest earned over time increases exponentially. Discounting is the process of finding the present value of a future amount by applying a discount rate. Review Questions What does the Time Value of Money imply about receiving $100 today versus $100 one year from now? How do you calculate Present Value (PV) using Future Value (FV), interest rate, and time period? Why is compounding important when considering the Time Value of Money?
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