What is Time Value of Money?
Time value of money is defined as “the value derived from the use of money over time as a result of investment and reinvestment”. It also means that “worth of a money today is different from the worth of same quantum of money in future”. The preference for money now, as compared to future money is known as time preference of money or time value of money.
It could also be defined as the compensation provided for investing money for a given period.
Let’s understand the concept of Time Value of Money with the help of an example :
If a person is given a choice to receive Rs 1,000 today or after two years from now. Which option should be chosen between the two?
A person should choose to receive the money today. After all, if money is received today it could be invested, which in two years may be much more than the original Rs 1,000.