InvestorQ : Why is it that the time value of money falls over a period of time and what are the contributing factors?
Nisha Chandani made post

Why is it that the time value of money falls over a period of time and what are the contributing factors?

Answer
user profile image
1 year ago


The value of money declines due to the combined impact of the following:

Inflation in the economy is a key factor. Inflation is called the thief of time. As inflation goes up, the value of money comes down and the purchasing power of money comes down. That is why time value is important.

Risks involved in delayed receipts of cash or financial transactions and money has an interest cost that most of us understand. The time value is nothing but the inverse of the interest rates that we earn when we invest money.

Opportunity cost of capital is a key factor. You can do a lot of things with money and invest in productively. When you use it for one purpose, you are forgoing a variety of other methods of using the money. That is also reflected in the time value of money.

While each of these forces alone can cause the value of money to decline individually, all the three usually act with different degrees of impact to cause a decline in the value of money as time flows.