gen-define-the-time-value-of-money-and-give-one-short-worked-exa-67e0

Define the time value of money and give one short worked example.

# Time Value of Money **Definition:** The time value of money (TVM) is the financial principle that money available today is worth more than the same amount in the future, due to its potential earning capacity. This core principle underlies all of finance—money can earn interest or returns, so any amount is worth more the sooner it is received. ## Simple Worked Example **Question:** You have two options: - Option A: Receive $1,000 today - Option B: Receive $1,000 in 2 years Which is better if you can invest money at 5% annual interest? **Solution:** If you take Option A and invest the $1,000 at 5% for 2 years: Future Value = Present Value × (1 + r)^n Future Value = $1,000 × (1.05)² Future Value = $1,000 × 1.1025 Future Value = **$1,102.50** **Conclusion:** Option A is better because $1,000 today becomes $1,102.50 in 2 years, which is more than the $1,000 you'd receive in Option B. The difference ($102.50) represents the time value of that money over 2 years.