The time value of money is a fundamental concept in finance that states a sum of money today is worth more than the same sum of money in the future.

This concept is based on the principle that money can grow through investing as money has the potential to earn interest or returns.

Money loses value over time if it is not invested and remains idle.

For example, consider one hundred dollars received today versus one hundred dollars received after one year.

If this amount is received today and deposited in a bank at an annual interest rate of 5 percent, one hundred dollars today will grow to one hundred and five dollars in a year.

Reinvesting the interest earned each year allows the investment to grow over time.

If the money is not invested today, one hundred dollars may buy fewer goods and services in the future due to inflation.

The time value of money plays a crucial role in various financial decisions, including investment analysis, loan agreements, and retirement planning for individuals.

This concept also guides businesses in various investment decisions and evaluating financing options.