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Sagot :
The time value of money shows the individuals that an amount of money offered today is determined to be more valuable than the same amount which will be offered in the future after considering the effects of inflation or interest rates.
For example, if a person had the option of receiving $100 today or $100 a year from now and the current inflation rate was 5%, the $100 today which has a higher purchasing power because the amount of $100 in one year would only be able to buy 95% of the goods that can be purchased with $100 today.
A corporate manager needs to understand the time value of money for making budgets or for budgeting purposes. For example, if a project were to yield a fixed amount of $100k per year, the purchasing power of the $100k per year will decrease as time goes on because of inflation.
The time value of money is irrelevant in situations where the purchase is to be made immediately and is paid in full.
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