The time value of money has gained greater importance in studying the viability of the project by comparing the initial investment with the anticipated future benefits. If the anticipated future benefits are more than the initial investment then the investment is found to be viable in generating the economic benefits. Why the time value of money principle is warranted to study under the financial Time Value of Money

management ?

The following are the many reasons involved:

To determine the real rate of return

With reference to Money employment on productive assets

In an inflationary period, a rupee today has greater purchasing power than rupee in

the future

The future is uncertain- Individuals prefer current consumption rather than future

consumption

**FOUNDATIONS OF THE TIME VALUE OF MONEY**

There are two, one is the time preference of money and another one is reinvestment

opportunity which are identified and inter related with each other. Early receipt of money paves way for the reinvestment opportunity but the later receipt does not carry the things.

Time value of money normally contains three different components viz: Real rate of return: It is the return which consider original return of the investment but it never considers the inflation rate. Expected/Anticipated rate of return: It is the positive rate of return normally expected

by every one on the amount of investment from the future.

**Risk premiums**: This an allowance is normally given to the investors to compensate the

uncertainty.

**CLASSIFICATIONS OF THE TIME VALUE OF**

**MONEY**

The concept of time value of money can be classified into two major classifications:

Future value of money

Present value of money

Future value of money: It is further bifurcated into two different categories viz

Future value of single sum and Future value of an Annuity

Present value of money: It is further classified into two major classes viz

Present value of single sum and Present value of and Annuity

Future value of single sum:

It could be found from the inbound relationship in between the future value of

money and present value of money.

FVn = PV(1+K)n

FVn = Future Value of Cash Inflow

PV = Initial Cash Flow

K = Annual Rate of Return

N = Life of Investment

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