Which is better, to have 100$ now or to have 110$ after one year? In this article I will explain what the time value of money is, and how to take your financial decisions based on this simple calculations.

Future value of Money!

100$ today does not equal to 100$ after one year. This is because the money lose some of its value each year. Furthermore, you lose an opportunity to invest your 100$ for this year. For example, if you deposited your 100$ in a bank, you would withdraw them 110$ by the end of the year. This concept is called time value of money, and by understanding this concept you would make better financial decision to yourself, or even to your company. The amount of lost investment, and value losses is called discount percentage.

How to calculate future money?

The Net Present Value (NPV) takes into account the value of the dollar today compared to the value of the dollar in the future, which is why it is a very important value to look at before making any large financial decisions. The formula of NPV is below:

Ct = net cash inflow during the period

Co= initial investment

r = discount rate, and

t = number of time periods

Simple right? Oh, just kidding, Microsoft Excel make it easy with the function NPV watch this video

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Applications of NPV:

Let’s say we have four projects, which one is better for your organization?

Cash Flow Estimate for Project A (all figures are in €M Euro):

Cash Flow Estimate for Project B (all figures are in €M Euro):

Cash Flow Estimate for Project C (all figures are in €M Euro):

Cash Flow Estimate for Project D (all figures are in €M Euro):

The following is the calculation of the NPV for each project:

Download the Excel sheet to calculate any NPV:NPV

This concept is applicable to your life situations as well, you make take decisions to sell your car with x amount in cash or x+y amount in installments where y is calculated from the NPV.