Concept

Time value of money

Summary

The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time value of money is among the factors considered when weighing the opportunity costs of spending rather than saving or investing money. As such, it is among the reasons why interest is paid or earned: interest, whether it is on a bank deposit or debt, compensates the depositor or lender for the loss of their use of their money. Investors are willing to forgo spending their money now only if they expect a favorable net return on their investment in the future, such that the increased value to be available later is sufficiently high to offset both the preference to spending money now and inflation (if present); see required rate of return. The Talmud (~500 CE) recognizes the time value of money. In Tractate Makkos page 3a the Talmud discusses a case where witnesses falsely claimed that the term of a loan was 30 days when it was actually 10 years. The false witnesses must pay the difference of the value of the loan "in a situation where he would be required to give the money back (within) thirty days..., and that same sum in a situation where he would be required to give the money back (within) 10 years...The difference is the sum that the testimony of the (false) witnesses sought to have the borrower lose; therefore, it is the sum that they must pay." The notion was later described by Martín de Azpilcueta (1491–1586) of the School of Salamanca. Time value of money problems involve the net value of cash flows at different points in time. In a typical case, the variables might be: a balance (the real or nominal value of a debt or a financial asset in terms of monetary units), a periodic rate of interest, the number of periods, and a series of cash flows. (In the case of a debt, cash flows are payments against principal and interest; in the case of a financial asset, these are contributions to or withdrawals from the balance.

Official source

https://en.wikipedia.org/wiki/Time_value_of_money

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