Q. Describes the Concept of Time value of Money?
'Time value of money' signifies that the value of a unit of money is different in different time periods. The worth of a sum of money received today is more than its value received after some time. On the contrary the sum of money received in future is less precious than it is today. Alternatively the present worth of a rupee received after some time will be less than a rupee received today. The time value of money can as well be referred to as time preference for money.
Three reasons perhaps attributed to the individual's time preference for money.
- Risk
- Preference for consumption
- Investment opportunities
We live under risk or else uncertainty. As an individual isn't certain about future cash receipts he or she prefers receiving cash now. Most people have slanted preference consumption over future consumption of goods and service either for the reason that of the urgency of their present wants or because of the risk isn't being in a position to enjoy future consumption that perhaps caused by illness or death Or because of inflation.