Time value of money
Would you prefer to be given a dollar today, or in one year’s time? Obviously you would prefer to be given it today, because you could then invest it, with interest, and a year from now it would be worth more. This is the simple intuition behind the time value of money, and it is a foundational concept in the world of finance.
When to use it
- To make investment decisions as an individual investor.
- To evaluate the return on a project.
- To compare activities that take place at different points in time.
No one knows the true origins of the concept – it has been around as long as money has existed. R.H. Parker, in 1968, traced the earliest interest-rate tables back to 1340, but the informal understanding that money ...