What do you mean by time value of money, Financial Management

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Q. What do you mean by Time value of money ?

The concept of TVM refers to the fact that the money received today is different in its worth from the money receivable at some other time in future. In other words, the same principle can be stated as that the money receivable in future is less valuable than the money received today. For example, if an individual is given an option to receive Rs. 1,000 today or to receive the same amount after one year, he will definitely choose to receive the amount today (of course he is presumed to be a rational being). The obvious reason for this reference for receiving the money today is that the rupee received today has a higher value than the rupee receivable in future. This preference for current money as against future money is known as the time preference for money or simply TVM.

This concept of TVM is applicable in equal strength to individuals as well as to the business firms. In case of most of the decision particularly those taken by a firm, the financial implications may occur over a period of time and quite often over a long period of time even up to ten years or more. Therefore, TVM becomes an important consideration for any financial decision.


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