Time Value of Money

Old is Gold!!

They say “Old is Gold” in reference to art, wine & cheese. I like to believe this saying is also apt when
it comes to Finance. How? Let me show you Why?

There is no better time than Now!!

Remember as kids our parents, elders & teachers always kept on saying to study diligently from the
very 1st day so that work does not pile up for the end i.e. days just before the exam? But we being the
dreamers, loved to delay our study time in spite of innumerous advices given to us.

It is true that every action or inaction has a Cause & Effect. We all know the Cause behind our
inaction would be attributed to – Procrastination but what about the Effect?

The following table shows the Effects of our actions & Inactions –

Yes Procrastination Effect!!

Days
Monday Tuesday Wednesday Thursday Friday Saturday Sunday Exam Day
Of Study
Hours of
0 0 0 0 0 2 6 2
Study

Hours of Study done = 10 hours

Marks Obtained = 30/60
Marks obtained per hour of study = 30/10 = 3 marks/hr (Efficiency Rate)

No Procrastination Effect!!
Days
Monday Tuesday Wednesday Thursday Friday Saturday Sunday Exam Day
Of Study
Hours of
1 1 1 1 1 2 6 2
Study

Total Hours of Study done = 15 hours

Total Marks Obtained = 50/60
a) Marks from Weekend & Exam Day Study = 30 hours (As calculated above)
b) Marks from Weekdays’ Study = 20 hours
Efficiency Rate:
a) From Weekend & Exam Day Study = 30/10 = 3 marks/hr
b) From Weekdays’ Study = 20/5 = 4 marks/hr

*Necessary assumptions made to formulate this example.

From the above table, we can see that the efficiency rate of studying just days before the exam i.e.
Weekend’s study was 3 marks/hr & weekdays’ study was 4 marks/hr. Thus, it would be fair to say that
the worth of present day (aka Weekdays) was more than the worth of days just before the exam (aka

Nidhi Kothari
 Time Value of Money
Weekend & Exam Day) because our efficiencies reduced due to uneven overload in the case of
procrastination.

The concept of Time Value of Money (TVOM) is akin to this example. How?

Well, as per TVOM concept, money today is generally worth more than money tomorrow. Money has
a time value. We say that because money has the power to make more money. Thus, a dollar
received today is costlier than the dollar received in future because it can be invested to make more
money. Hence, I like to believe “There is no time better than Now” and “Old is Gold” are true in both,
our studies and finance.

TVOM concept is the one which we use in our daily lives and is one of the fundamental concepts in
Finance. The TVOM impacts business finance, consumer finance and government finance but it
results from the concept of interests.

In our next topic, we will be discussing the Simple & Compound Interest followed by Present &
Future Value discussions.

Topics
a) Simple Interest a) Present Value
b) Compound Interest b) Future Value

Nidhi Kothari