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time value of money

Contributor(s): Matthew Haughn

Time value of money is the concept that money acquired sooner or held onto longer has a greater worth or potential worth due to the possible accumulation of interest or ROI while that money is saved or invested.

Time value of  money is often used to improve the precision of financial calculations within the enterprise, as part of IT asset management, enterprise resource planning (ERP),  decision management and cost/benefit analysis, for example.

When money is acquired earlier and/or held longer, it has the potential to increase through investment or interest, among other possibilities. Time value of money quantifies this potential and contrasts the greater potential value of a sum of money received or invested earlier with the value of the same sum received or invested later.

Anytime a sum of money is invested or saved in an account that yields interest, the time value of the money is being exploited. Time value of money is also often considered in situations where an individual or business has multiple options. For example, there may be an option to get a particular sum immediately or to get a more substantial sum at a later date. Quantifying and comparing the potential value of both sums at some future date can make it easier to make an informed decision.

Normalized practices such as charging in advance for services, such as Internet or phone, and paying in arrears allow businesses to profit from time value of money.

See also: net present value (NPV)

This was last updated in August 2015

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