Maximizing Returns: Understanding the Time Value of Money in Investment Analysis

Abstract

A fundamental idea in finance known as the time value of money (TVM) asserts that money is worth more today than it will be in the future. This is because money can be invested and earn interest, so the longer you have it, the more it is worth. This research paper aims to explain the concepts of TVM, its applications, and its importance in financial decision-making. The paper begins by defining TVM and discussing its importance in finance. Next, the concepts of future value, present value, discounted cash
flow analysis, and compounding and interest rates are explained. The paper then discusses the various applications of TVM, including investment decisions, capital budgeting, valuation of bonds and stocks, retirement planning, and leasing vs. buying. The paper also examines the limitations and assumptions of TVM, the importance of considering inflation, and the impact of taxation. The main ideas are outlined in the paper’s conclusion, and their consequences for financial decision-making are also covered.