Time value of money

The time value of money is the value of money estimating in a given amount of interest gain or inflation accrued over a given amount of time. The ultimate principle suggests that a given amount of money today has different buying power than the similar amount of money in the future. This notion exists both because there is a chance to earn interest on the money and because inflation will drive prices up, thus varying the "value" of the money. The time value of money is the basic concept in finance theory.

The method also allows the calculation of a likely stream of income in the future, in a way that the annual incomes are discounted and then calculated together, thus providing a lump-sum "present value" of the entire income stream.