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\r\nThe time value of money (TVM)<\/strong> is the concept that a sum of money is worth more now than the same sum will be at a future date due to its\u00a0earnings potential<\/a>\u00a0in the interim. The time value of money is a core principle of finance. A sum of money in the hand has greater value than the same sum to be paid in the future. The time value of money is also referred to as the present discounted value.<\/p>\r\n Investors prefer to receive money today rather than the same amount of money in the future because a sum of money, once invested, grows over time. For example, money deposited into a\u00a0savings account<\/a>\u00a0earns interest. Over time, the interest is added to the principal, earning more interest. That's the power of compounding interest.<\/p>\r\n If it is not invested, the value of the money erodes over time. If you hide $1,000 in a mattress for three years, you will lose the additional money it could have earned over that time if invested. It will have even less\u00a0buying power<\/a>\u00a0when you retrieve it because\u00a0inflation reduces its value<\/a>.<\/p>\r\n As another example, say you have the option\u00a0of receiving $10,000 now or $10,000 two years from now. Despite the equal face value, $10,000 today has more value and\u00a0utility<\/a>\u00a0than it will two years from now due to the opportunity costs associated with the delay.\u00a0In other words, a delayed payment is a missed opportunity.<\/p>\r\n\r\n The most fundamental formula for the time value of money takes into account the following: the\u00a0future value\u00a0<\/a>of money, the\u00a0present value<\/a>\u00a0of money, the interest rate, the number of compounding periods per year, and the number of years.<\/p>\r\n Based on these variables, the formula for TVM is:<\/p>\r\n