So what is time value of money in laymen terms? In finance, money is perceived as more valuable today then it is in the future. As an example, a dollar today, does NOT have the same VALUE ten years from now. Imagine how much it costs to buy a hamburger 10 years ago versus today. You can think of time value of money another way, 1 dollar will be 1.20 if the interest rate is twenty percent in a year. Interest, inflation, economy may affect the value of money. Generally, this term is referred to as TVM and can be easily calculated through a business calculator. On a calculator, there are 6 buttons that are used for TVM calculations (the labels in the calculator may vary, but the functions are essentially the same). They are: PV, PMT, FV, I/Y, N and CPT.
PV= Present Value
PMT= Payment
FV= Future Value
I/Y= Interest
N= Period
There you have it. See the next posts for examples.
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