The time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an
equal amount in the future, all else being equal. In particular, if one
received the payment today, one can then earn interest on the money until that specified future date.
It can be used to compare investment
alternatives and to solve problems involving loans, mortgages, leases, savings,
and annuities. TVM is based on the
concept that a dollar that you have today is worth more than the promise or
expectation that you will receive a dollar in the future. Money that you hold
today is worth more because you can invest it and earn interest.
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