What is the concept of time value of money?

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 What is the concept of time value of money? 


 What is the concept of time value of money?

The time value of money concept states that cash received today is more valuable than cash received at some point in the future. The reason is that someone who agrees to receive payment at a later date foregoes the ability to invest that cash right now. The only way for someone to agree to delayed payment is to pay them for the privilege, which is known as interest income. Time value of money is the concept that the value of a dollar to be received in the future is less than the value of a dollar on hand today (Muda & Hasibuan, 2018). One reason is that money received today can be invested thus generating more money. Another reason is that when a person opts to receive a sum of money in future rather than today, he is effectively lending the money and there are risks involved in lending such as default risk and inflation.

References

Muda, I., & Hasibuan, A. N. (2018). Public Discovery of the Concept of Time Value of Money with Economic Value of Time. In Proceedings of MICoMS 2017 (pp. 251-257). Emerald          Publishing Limited.




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