The Time Value of Money (TVM) is the foundation of all financial valuation. A euro today is worth more than a euro tomorrow because it can be invested to earn returns. This concept drives NPV, IRR, DCF, and every investment decision.
Future Value
FV = PV × (1 + r)^n
PV = present value, r = discount rate per period, n = number of periods.
Present Value
PV = FV / (1 + r)^n
How much a future cash flow is worth today.
Key Takeaways
- A euro today > a euro tomorrow.
- Higher discount rate = future cash flows worth less today.
- TVM is the foundation of all valuation methods.
- Startups use 15-30% discount rates due to high risk.