What is Time Value of Money

The concept of time value of money refers to the fact that the money received today is different in its worth from the money receivable at some other time in future. In other words the same principle can be stated as:
‘The money receivable in future is less valuable than the money received today.’
The concept of time value of money is applicable in equal strength to the individuals as well as to the business firms. In case of most of the decisions particularly those taken by the firms, the financial implications may occur over a period of time. There are several reasons for preference to receive money now such as:
1. Future uncertainties: One of the reasons for preference of current money is that there is certainty about it whereas the future money has uncertainty. There may be an apprehension that the other party may become insolvent or untraceable.
2. Preference for present consumption: Besides certainty, every person also has a preference for present consumption though this preference may be subjective and differ from one person to another. The present money may be required for some specific needs.
3. Reinvestment opportunities: Individuals as well as firms have preference for present money because they have reinvestment opportunities available to them. If they have got the money, they can invest this money to get further returns on this. This opportunity to get the return will not be available if money is not invested now.

For example: If an individual is given an option to receive 1000 today or to receive the same amount in future then he will definitely choose to receive the amount now.
In other words time for the money is the rate of return which the firm can earn by reinvesting its present money. This rate of return can also be expressed as the required rate of return to make equal the worth of money of two different time periods.

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