It helps you define the amount you need to save for your retirement to maintain the same lifestyle during the retirement period. Inflation-Adjusted return is also helpful to individuals for planning their retirement. The main reason behind doing this is that the return that investor gets after the return period based on a return rate will have less purchasing power than that of present value.Īdjusting the return according to the expected inflation rate gives you a brief idea of purchasing power at the completion of the project. Smart investors always take into consideration the inflation rate while investing in bigger projects. In simple terms, it is the devaluation of money which decreases the purchasing power. It results in a fall in the purchasing value of money. In economics, the inflation rate is the rate at which prices increase over time. You need to provide only 3 arguments: Investment amount, period and rate of return. Generally, you can easily calculate the future value of an investment using FV Function in excel. Moreover, it calculates inflation-adjusted return for a single deposit as well as multiple deposits over a specific period.Īll you need to do is just enter a few details and it will automatically calculate it for you. You can use the following Time Value of Money Calculator.Additionally, it calculates the deflated value of an investment over a specific period. The time value of money formula can be used in many financial decision making : Let’s say for example if you were given a certificate for $150 of free gasoline in 1991, then you could have purchased a lot more gallons of gasoline than you could have in hand if you were given $150 of free gas a decade i.e. This can be best exemplified by the value or the prices of commodities such as food or gas. Why is this factor being so much important? Well, the reason being inflation constantly erodes the value of the money, and henceforth the purchasing power of the money. Both the factors will need to be taken into account along with whatever the rate of return that may be realized by investing the amount of money. The time value of money is a wider concept and can also be related to the concepts of purchasing power and inflation. Therefore, if any bank holder will deposit $200 in the bank account, then the expectation from the customer will be to receive more than $200 after 1 year. Money which is deposited in the savings bank account will earn a certain interest rate as it must compensate for keeping the amount of money which is invested by a client and is away from them at the current period. TVM) can also be referred to as Discounted present value. This will be due to its earning capacity which will be potential of the given amount. The Time Value of Money concept will indicate that the money which is earned today it will be more valuable than its fair value or its intrinsic value in the future. Explanation of the Time Value of Money Formula
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