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Time Value of Money: How to Determine the Value of Money with Respect to Time

Money received today is more valuable than the same amount of money a year from now. It is essential to understand the relation between mone...

Time Value of Money: How to Determine the Value of Money with Respect to Time

Value of Money with Respect to Time

Money received today is more valuable than the same amount of money a year from now. It is essential to understand the relation between money and time since the value of money is affected by time through Inflation and Loss of Opportunity. Money loses its purchasing power over time due to inflation. As prices rise, the same amount of money today won't be able to purchase the same number of goods a year from now. Another way you lose money over time is through loss of opportunity. Cash received a year before could have earned had it been invested then.

To determine the value of money over time, we will use the formula below.

PV = Present Value
FV = Future Value
IR  = Interest Rate
N   = Number of Years

PV = FV / (1+IR)N