50

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.

Origins

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 ...

Get Key MBA Models now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.