Future Value

The time value of money is a financial concept that relates to the earning power of money. When money is held over a period of time, it can be invested so that the value of that money grows. This can be interest earned in a bank account, or earnings from investments. Similarly, the value of money that is not earning will erode over time, because of inflation that weakens the purchasing power of money. Thus, financial managers will take these factors into account when calculating cash flows -- money in the future is not worth as much as money today (Investopedia, 2013).

The time value of money therefore reflects two key variables -- time and interest. The interest or discount rate is the prevailing rate of interest in the economy, or for the company. This combines with time to increase or decrease the value of money. For financial...
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