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Time Value of Money

One of the most fundamental concepts in finance is that money has a “time value.” That is to say, money in hand today is worth more than money that is likely to be received in the future. For example, if you are offered the choice between having 10,000 today and having 10,000 at a future date, you would prefer to have 10,000 now. By accepting 10,000 early, you can put the money in bank and earn some interest. Thus, the time gap allowed helps us to make money. This incremental gain is time value of money.

The Time Value of Money concept is grouped in two areas: Future Value and Present Value. Future Value is the method of discovering what an investment today will grow to in the future. Present Value on the other hand is the process of determining what a cash flow to be received in the future is worth in today's value.

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