Time Value of Money

The time value of money is the idea that receiving a given sum of money now is generally worth more than receiving the same sum later, because money available today can be invested to earn a return, making a dollar in hand today worth more than a dollar received in the future. This principle underlies why loans and deposits carry interest, since interest compensates a lender for temporarily giving up access to their own funds, and it also factors into the opportunity cost of choosing to spend money now rather than save or invest it. In practice, cash flows that occur at different points in time are converted to a single point in time using a discount rate, and this discounted-sum approach underlies net present value calculations used in valuation and capital budgeting; analysts applying it need to keep nominal and real, meaning inflation-adjusted, figures consistent with each other, since mixing the two can distort the result. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/