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The Time Value of Money (TVM) is a crucial financial concept that assesses the worth of money over time, factoring in investment returns and inflation. It's vital for corporate finance, aiding in capital budgeting and investment analysis by using mathematical formulas to calculate present and future values. Understanding TVM is key for personal finance, retirement planning, and investment strategies, as it helps gauge the real value of money considering potential earnings and inflation's impact.

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## Definition and Importance of TVM

### Fundamental financial concept

The Time Value of Money recognizes the increased worth of money received now rather than later

### Effects of inflation

Erosion of purchasing power

Inflation erodes the purchasing power of money over time, reinforcing the idea that a dollar today is worth more than a dollar in the future

### Application in corporate finance

The Time Value of Money is a critical tool for making informed decisions in processes such as capital budgeting, investment analysis, and project valuation

## TVM Formulas

### Future Value (FV) formula

The FV formula predicts the growth of an investment over time by considering the present value, interest rate, and compounding periods

### Present Value (PV) formula

The PV formula is used to determine the current equivalent of a future sum of money, taking into account the same variables

### Practicality in everyday financial decisions

TVM formulas help individuals and businesses evaluate options such as loans, investments, and savings plans by determining the present value of expected future cash flows

## Influence of Inflation

### Impact on the Time Value of Money

Inflation reduces the future purchasing power of currency, making it important to consider when calculating the value of money over time

### Real Interest Rate

The Real Interest Rate, adjusted for inflation, provides a more accurate reflection of the true earning potential of money over time

### Mathematical formulas

The Time Value of Money is supported by mathematical formulas that establish a relationship between present and future values, incorporating the interest rate and duration of investment or loan

Algorino

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