Time Value of Money

The concept of time value of money states that the cash received today at this point of time is more valuable as compared to the cash received in future at some other point of time.  The major reason to make this statement is that cash in hand right now can be used to invest where as the person who agrees to receive cash at some point in future let goes the ability to invest the cash at that time. However some companies agree with the delayed payment just to earn some additional income that is called interest income.

The interest income is an example of the time value of money. For example say a person has an amount of $10,000 now and he is going to invest it at an interest rate of 10 percent per year. This means that on the interest rate of one year the person earns $1000 in a year that is called the interest income and the person was unable to earn that income if he has not invested the money for that income.

There are several different uses of the time value of the money and one of the most common uses is to calculate the present value of an annuity. As we know that an annuity is the series of regular payments in regular intervals of time that is most commonly used in the process of budgeting and planning.


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