Time value of money is a financial concept that explains that money available at the present time is worth more than the same amount in the future due to its potential to earn interest or grow in value. There are five key variables in time value of money calculations: present value, future value, number of periods, interest rate, and payment amount. The time value of money draws from the idea that rational investors prefer receiving money today rather than in the future because it provides more utility and opportunity to earn additional value through interest or returns.

1. Business Finance
Use your life example to express the concept of time value of money, for example, present
value, future value, and payment per period.
Time value of money is the concept that money available at the present time is worth more than
the identical sum in the future due to its potential earning capacity. This is a principle of finance,
which explains that provided money can earn interest, any amount of money is worth more the
sooner it is received. The time value of money draws from the idea that rational investors prefer
to receive money today rather than the same amount of money in the future because of money's
potential to grow in value over a given period of time. This concept indicates that money earned
today will be more than its intrinsic value in the near future. Time Value of Money is also
referred to as Present Discounted Value. Money deposited in a savings bank account earns a
certain interest rate to compensate for keeping the money away from them at the current point of
time. Hence, if a bank holder deposits $100 in the account, the expectation will be to receive
more than $100 after one year.
Further illustrating the rational investor's preference; assume that the investor has the option to
choose between receiving $10,000 now versus $10,000 in two years. It's reasonable to assume
most people would choose the first option. Despite the equal value at time of disbursement,
receiving the $10,000 today has more value and utility to the beneficiary than receiving it in the
future due to the opportunity costs associated with the wait. Such opportunity costs could include
the potential gain on interest were that money received today and held in a savings account for
two years.

2. There are five variables in time value of money :
1. Present value (PV) - This is your current starting amount. It is the money you have in
your hand at the present time, your initial investment for your future.
2. Future value (FV) - This is your ending amount at a point in time in the future. It should
be worth more than the present value, provided it is earning interest and growing over
time.
3. The number of periods (N) - This is the timeline for your investment (or debts). It is
usually measured in years, but it could be any scale of time such as quarterly, monthly, or
even daily.
4. Interest rate (I) - This is the growth rate of your money over the lifetime of the
investment. It is stated in a percentage value, such as 8% or .08.
5. Payment amount (PMT) - These are a series of equal, evenly-spaced cash flows.
Payment per period- It’s the amount that you’re adding to the PV per period. It represents equal
periodic payments received or paid each period. When payments are received they are positive,
when payments are made they are negative. PMT (payment) components are all expressed in the
same frequency. For example, if you are using an annual interest rate, then the number of periods
should also be expressed annually. If you’re using a monthly interest rate, then the number of
periods should be expressed as a monthly figure.
How often payments are made in each period decides the payment amount:
• 1 for annual payments
• 4 for quarterly payments

3. • 12 for monthly payments
• 365 for daily payments
For example: what would $1,000 compounded semiannually over the 10-year period be?
Semiannual compounding means a 10 percent annual interest rate is converted to a 5 percent
interest rate and charged for half of the year. The interest amount is then added to the original
amount, and the interest during the last half of the year is 5 percent of this larger amount.
Semiannual compounding will result in 20 compounding periods over a 10-year period, while
annual compounding results in only 10 compounding period. A shorter compounding period
means a larger number of compounding periods over a given time period and a greater
compounding impact. If the compounding period is shortened to monthly or daily periods, the
compounding impact will be even greater.
Present Value: If I have $100 in my wallet now, then its present value is $100. Present value is
referred to as PV.
Future Value: If I take the $100 I have now in my wallet and deposit it into a savings account in
a bank. Let’s say that the bank gives me an annual interest of 5%. For simplicity, let’s assume
that compounding is done annually. At the end of one year, my savings account will have:
1. Total = Principal (this is the amount I deposited) + Interest.
2. Principal = $100 (this is the amount I deposited).
3. Interest = $100 * 0.05 = $5.00 (5% of $100, interest earned during the one year period).
4. Total = $100 + $5 = $105.
In other words, the future value (FV) at the end of one year is $105.

4. Sources:
https://diseasecalleddebt.com/time-value-money/
http://stretchadime.com/time-value-of-money/
https://www.wallstreetmojo.com/time-value-money/
https://strategiccfo.com/time-value-of-money/
https://www.relakhs.com/what-is-time-value-of-money-tvm/
https://www.investopedia.com/terms/t/timevalueofmoney.asp
https://www.propertymetrics.com/blog/2014/06/17/time-value-of-money/
https://www.listenmoneymatters.com/time-value-of-money/
https://www.calculatorsoup.com/calculators/financial/present-value-calculator.php
https://www.extension.iastate.edu/agdm/wholefarm/html/c5-96.html
https://psu.instructure.com/courses/1806581/pages/introduction-what-is-time-value-of-money