Watch this video to learn about the time value of money along with some real-life examples explained by your Finance Guru, Vishal Thakkar.
Ladies and gentlemen boys and girls they come back to finance you today we will take you forward in time into the future yes today’s topic of discussion is time value of money money and time are interrelated we all know that most of the time we trade our time for money this is what people who do a job they know they give their fixed time to the company they do
Whatever they are asked to do and then they get paid for that but hello are we talking about that time value of money no we are talking of concept of time value of money in relation to accounting and finance now friends we all know in our previous videos we have discussed in ample detail that we have sir john maynard keynes and his liquidity preference theory of
Interest which told us that reward for parting with liquidity is interest so 100 rupees today and 100 rupees one year from now do not have the same value let me give you a safe harbor here i am not talking about inflation even if inflation is zero percent the value of hundred rupees today and the value of 100 rupees one year later is different why because of the
Interest component now imagine you have three people who are promising to give you 110 rupees one year from now let’s call one of them is a bank who tells you that give me hundred rupees today and i will give you 110 one year from now another gentleman is mr. haire who is saying that give me one hundred and five rupees today and i will give you one hundred and ten a
Year later and the third gentleman is mr. tortoids mr. tortoise is saying you give me 90 rupees today and i will give you hundred and ten rupees one year from now tell me friends who would you like to go with the bank the hair or the tatas obviously the answer is tortoids because even though the amount promised by all three of them is the same however your todays
Investment in case of thor toys is the least then comes the bank and finally comes here so what do we conclude we conclude that present value please mark my words present value of one hundred ten rupees one year from now at 10 percent interest is 100 today which is promised by the bank well in case of hair the rate is different and in case of tortoids the rate is
Different for hair the rate is much lesser for toto is the rate is much higher this in a nutshell is time value of money when we evaluate any project where we are putting in money today and the project will generate profits in future it is essential for the project and the finance manager to bring the future value of money to its today’s value and compare it with
The initial investment which you are making today so let us say if you are investing hundred crores in a project today which will give you a profits of 20 crores in the first year 30 crore in the second year 50 curls in the third year and 60 crores in the fourth year now what is required to be done is the value of 20 crores one year from break is much lesser than
20 crores in today’s terms obviously because you will have to discount it to today’s value and so on for 30 50 and 60 so once you bring all the monies which you will receive in future to today’s value and compare it with your investment today you will understand whether you are really making any economic profit or it is just the nominal value so time value of money
If you go in future we technically call it compounding i am sure you relate to your 8 standard mathematics where you have compound interest formula called 1 plus r raised to n and when you travel back in time from future to present it is discounting which is inverse of compounding popularly 1 upon 1 plus r raised to n so basically time value of money intelligently
Tells us the inbuilt reward of parting with liquidity so you remember if you go in future you compound if you come back in present you discount i hope you understood the concept of time value of money all the best and do subscribe to our channel finance t we all know that people from non finance background struggle to manage their finances they hid the reality when
They get their first paycheck and from then on they are all by themselves to manage their money on their own for lifetime it’s like asking you to fly a plane without any formal training it’s very risky so our endeavor through our books our videos and all other mediums is to educate you financially so that you don’t outsource managing your own finances to somebody
Else and suffer because of inefficiencies of other people some of the best sellers fourth position on the bestseller list finance for non finance what is an si p an si p is offered by mutual fund as an alternative to a recurring deposit of a bank so what do you do you take out a fixed sum of money every month and put it into your favorite mutual fund and you see your money grow
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What is Time Value of Money? Explained With Examples by Vishal Thakkar By Finance Tube