The time value of money has obtained greater significance in studying the feasibility of the project by associating the initial investment with the projected future benefits. If the anticipated future benefits is greater than the initial investment made then the investment is found to be feasible in generating the economic benefits.
Time value of money is important to determine the real rate of return, with reference to capital employment on productive assets; In an inflationary era, a rupee today has greater value or purchasing power than rupee in the future; The future is uncertain, because of the risk of uncertainty individuals prefer current consumption rather than future consumption.
Time value of money on the whole contains three different components viz:
1. Real rate of return: Actual return of the investment made.
2. Expected/Anticipated rate of return: It is the optimistic rate of return normally expected by every one on the amount of investment from the future.
3. Risk premiums: This an allowance is normally given to the investors to compensate the uncertainty.
Classifications of Time Value of Money
1. Future Value
a. Single sum
b. Annuity
2. Present Value
a. Single sum
b. Annuity
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