What factors affect the time value of money?

Present value and future value are both involved in the time value of money. Both consider three factors: principal, interest rate, and time. . Simple Interest Simple interest is computed based on the principal amount (original amount) and based on the annual time. It is computed by multiplying together the principal, rate, and time.

How do you calculate time value of money?

The formula for the time value of money, from the perspective of the current date, is as follows: Present Value (PV) = FV ÷ [1 +( i ÷ n) ^(n × t) Where: Alternatively, to calculate the future value given the present value, the formula used is: Future Value (FV) = PV × [1 + (i ÷ n)] ^ (n × t)

Why is time value of money important?

This means that future cash flows are discounted to reflect their present value, taking into consideration factors such as inflation and the opportunity cost of capital. By incorporating the time value of money, businesses can make more accurate revenue projections and better assess the profitability of potential investments.