Why does money have a “time value”?

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Money has a “time value” because it is more valuable when received sooner rather than later. You can invest money to make interest. This means that the compounding return will increase your future value. This means that if an investor receives $1,000 today and invests it at 5% for 10 years, they will have earned $650 in additional income by the end of those 10 years compared to waiting until year 10 to receive the original amount without any accrued interest (Melicher & Norton 2016). This concept of time value helps explain why money that is held today will be more valuable than the equivalent later due to possible growth and return on investments.

The saying “time is money” refers to how both are resources with finite availability; essentially suggesting that while one cannot create either resource, certain investments can make them much more valuable over time (Melicher & Norton 2016). The concept of “time value” of money refers to the ability to understand which investments might yield greater returns depending upon a given timeline. For example – investments with longer maturity dates usually carry higher risks but also promises greater rewards compared to short-term investments with lower risk profiles but smaller returns. Therefore, depending on an individual’s appetite for investment risk and their financial goals related timeline , investors must understand how best use their capital ‘s finite “time” maximize return .

A $5,000 investment at 5 percent would yield a Future Value of $9762.71 over 10 years. For 7 year periods, the FV would increase to $7269.95; for 4 years 9 percent would compound annually to equal $ 668676 ( Melicher Norton 2016). The total expected amount after the specified periods, assuming that no withdrawals were made. Melicher Ronald W Edgar Norton Introduction Finance Markets Investments Financial Management Financial Management EnhancedText WileyGlobal Education US 2016 [Savant Learning Systems]

The present value of a person willing to pay current dollars for something they promise in the future. A discount rate is used to determine the level that must be paid.

Example: Present value of 5000 at the end of 10 years given a 5 % discount equals 3444 37, whereas this exact scenario applies to 7000 at the end 9th year. The 9 % formula detailed above is for par 2590 20 3000 promise conclusion. Finally Return Investment ROI costs 500 bring 800 fourth ending four 85 percentage points determined utilizing calculation 500/800 = 0 85 * 100% = 85% increase initial principal invested. Melicher Ronald W Edgar a Norton Introduction Finance Markets Investments Financial Management Wiley Global Education USA 2016 [Savant Learning Systems].

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