Time value of money simply tries to explain the future value of today's money so as to help in making investment decisions. A dollar today is worth more than a dollar tomorrow (thats true only if u earn returns more than the inflation rate and ur cost for raising capital) U might have heard this a million times but has a major impact in financial world that's why putting it on top of my list. If a Dollar or any currency for that matter is worth only a dollar tomorrow what sense does it make to put anything in the investment or to have financial market or pay interest on the loans?
For example, 100 Rs today, invested for one year with 5 percent interest will be worth 105 Rs after one year. Therefore, 100 Rs paid now or 105 Rs paid exactly one year from now both have the same value to the recipient (assuming 5 percent Internal Rate of Return) using time value of , 100 RS invested for one year at 5 percent interest has a future value of 105 Rs, and subsequently Present value of 100 rupees to be received after 1 year can be derived after discounting 105 Rs @5% (105/1+5%) for a period of one yr. i.e. 100, (Please note the two very important term present value and future value of Investment these are used widely in industry will be discussed further in details)
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