The
time value of money is one of the basic concepts of
finance. Time value of
money is the change in consumption power of money over time. $100 today can consume more than $100 in 5 years.
A hundred dollars invested today at 5% per year interest rate will yield
- <math>{\rm present\ amount}\times(1+{\rm interest\ rate})^{\rm term}=\$105</math>
in 1 year. So the
future value of $100 in 1 year at 5% per year is $105
A hundred dollars 1 year from now at 5% interest rate is today worth:
- <math>\frac{\rm present\ amount}{(1+{\rm interest\ rate})^{\rm term}}=\frac{\$100}{1.05}=\$95.23.</math>
So the
present value of $100 1 year from now at 5% is $95.23
See Also: Time preference theory of interest