Time value of money

From Wacklepedia - The Free Encyclopedia

The time value of money is one of the basic concepts of finance. Time value of money is the change in consumption power of money over time. $100 today can consume more than $100 in 5 years. It also takes into account some risk. $100 today is a sure thing and can be enjoyed now. In 5 years that money could be worthless or not returned to the investor. This is where the interest rate inherent in TVM comes from.

A hundred dollars invested today at 5% per year interest rate will yield

in 1 year. So the future value of $100 in 1 year at 5% per year is $105

A hundred dollars 1 year from now at 5% interest rate is today worth:

So the present value of $100 1 year from now at 5% is $95.23