Plugging in the values from this example, we can calculate the time value of your money.įuture value = $2,500 x (1.05)^3 = $2,894 Let’s assume your money would earn you a 5% return if it stayed in your account. To calculate for the time value of your money, you would use this formula:įuture value = Current value x (1+ annual interest rate) ^ number of years So, its potential interest rate is a good benchmark for figuring out time value. Whatever that alternative investment with a comparable risk level is, that’s the money you are not earning while your money is tied up. Treasury bonds might be a good comparison. If the investment is less risky, the return on U.S. If there is comparable risk to an equity investment, the average return of the stock market might be a reasonable return. If there is an alternative investment with similar risk, the rate of return on that investment is a good discount rate to use. A reasonable return your investment would yield. If the reference period is several years, the time value of money is likely extremely high. Because of compound interest, the time value of money grows exponentially over time.
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