I am writing you this memo to help you comprehend the concept of the time value of money. You hinted to me earlier that you have been having difficulties explaining what the above concept is to the customers who wants to invest their money.
Time Value of money is a financial principle to ensure money is available now is worth more that the equal amount of money in the future, since money has the potential to earn more if the present funds are committed to any venture that could earn interest. This is simply to mean that Money has an attached value. This further means that every dollar today is worth more than its previous value in the time before.
There are five variables that account for the time value for money:
- Firstly, there is the present value which is the current value of money that one would want to invest.
- Secondly, there is future value referring to the value of current money in time to come in as far as it grows and earns interest.
- Thirdly, the number of periods; referring to the time that the current sum of money will take to grow when invested.
- Forth, interest to indicate the rate of growth of the money invested, usually stated in percentile value for example 70%.
- And lastly payment amount which is the sum of money paid for the investment in equal series.
The Formula for finding value for money;
Please be free to give your feedback on the same. If you have any questions, or need more clarification, direct them to my email or call me directly. I will be ready to help.
Head of the Financial Department