Time Value of Money Calculator
Our Time Value of Money (TVM) calculator is a simple and easy to use tool to calculate the present value, future value, interest rate, or fixed payment of an investment, deposit, credit, or other financial transaction.
How to use the TVM calculator
Our Time Value of Money (TVM) calculator makes it easy to calculate various financial quantities related to the time value of money such as the present value, future value, interest rate, and repeating payments required for a loan or to increase a deposit’s value to a certain amount. Simply select what you want to solve for in the TVM equation, provide the remaining values, and press “Calculate”. If you are uncertain about how to proceed, consult the question marks next to each field’s label for guidance.
When entering values, use a minus sign (-) in front of them if they represent cash outflows. For example, enter -100 if you are depositing or investing $100, and enter “100” if you are taking a loan worth $100. Similarly, enter “-20” if you are withdrawing money from an investment or deposit, and enter “20” if you are depositing $20 to cover the interest or principal of a loan/credit.
It is important to note that the interest rate entered in the calculator should be the effective interest rate based on the period for which you are performing the calculation. For example, if the period is a year (e.g. you’ve entered “5” for the “Number of periods” field and this is a 5-year loan), then you should enter the effective annualized interest rate. If the period is a month, you should enter the effective monthly interest rate instead.
Understanding the Time Value of Money
The concept of time value of money is a fundamental concept in finance that reflects the idea that money has different value at different points in time. It is based on the principle that humans prefer to receive money now rather than later, given the same amount of money. This is due to the fact that people can use the money immediately, whereas the future value of money is uncertain.
Interest rates are a direct reflection of time preference, as they compensate for the opportunity cost of using money over a certain period of time. When interest rates are low, the opportunity cost is perceived to be low, and when interest rates are high, the opportunity cost is perceived to be high. Investors use this concept to make decisions about whether to invest in a certain venture by calculating the expected return on investment versus alternative investments.
In personal finance and business finance, the concept of time value of money is essential in managing money effectively. It is used to make decisions about saving, investing, and borrowing money, as well as in valuing assets and businesses. Understanding the time value of money can help individuals and businesses make better financial decisions and achieve their financial goals.
TVM Formula
The calculation of time value of money (TVM) involves the use of the following inputs: present value (PV), future value (FV), the value of the individual payments in each compounding period (A), the number of periods (n), and the interest rate (r).
The following formulas can be used to calculate present value and future value without periodical payments:
Present value (PV) = FV / (1 + r)^n
Future value (FV) = PV * (1 + r)^n
Where PV is the present value of the investment, FV is the future value of the investment, A is the value of the individual payments in each compounding period, n is the number of periods, and r is the interest rate.
It’s important to note that these formulas are based on the assumption that there are no cash flows other than the initial investment and the future value. In practice, additional cash flows may be included by adjusting the formulas accordingly. Additionally, the formulas are based on simple interest, rather than compound interest.
What can the TVM formula calculator solve for?
Our online TVM calculator can help you make better wealth management decisions by providing you with the calculations based on the formulas mentioned above. Using the input values, the calculator can calculate the following:
- Present value (PV) of an investment, which is the current value of the investment, adjusted for the time value of money.
- Future value (FV) of an investment, which is the value of the investment at a future point in time.
- Interest rate (r) required for an investment to reach a certain future value.
- The amount of fixed payments (A) required to reach a certain future value.
- The number of periods (n) required for an investment to reach a certain future value.
By providing the inputs and solving for the desired variable, the calculator can help you make more informed financial decisions, such as determining the best time to invest, the optimal investment amount, and the expected return on investment.