BUS202: Principles of Finance

This video discusses the difference between present value and future value. The time value of money assumes that individuals face either an increase in prices in the economy as time passes in the form of an inflation rate, such as a 4% annual inflation rate, or an opportunity to put their savings in an investment account offering an interest rate, such as 5% per year. Therefore, under the "time value of money" concept, you can see that the $1,000 that you can receive in two years from today does not have the same value as $1,000 today. In fact, it will have a lesser value today. Likewise, if you receive $1,000 today and have the opportunity to put this money in an investment account earning 5% per year, in two years, you will have more than $1,000.