What is Time Value of Money?
Time value of money is the financial concept that a sum of money available today is worth more than the same sum in the future, because the present amount can be invested to earn a return.
How It Works
- Discount future cash flows to present value using a discount rate.
- Compound present amounts to future value using an interest or return rate.
- Use in valuation, capital budgeting, and loan amortization.
Saudi Context
Saudi banks and PIF portfolio companies discount cash flows in SAR using risk-adjusted rates. Islamic finance uses profit-rate proxies in place of conventional interest in TVM calculations.
Example
SAR 100,000 in 5 years discounted at 8% is worth about SAR 68,000 today.