Final answer:
The time value of money concept explains how money's worth changes over time due to factors like interest and inflation, impacting financial decisions.
Explanation:
The time value of money refers to the principle that a sum of money today does not have the same value as the same amount of money in the future, due to factors like interest and inflation. In finance theory, this concept is central as it helps in determining the worth of money over time, considering the impact of interest rates and inflation on purchasing power.
For instance, if you invest [tex]$100 today with an annual interest rate of 5%, after one year at a compounded rate, the future value would be $[/tex]105. This showcases how money's value changes over time due to various financial factors.
The formula to calculate future value involves considering the initial investment, annual interest rate, and the number of years, reflecting how the time value of money plays a crucial role in financial decision-making and planning.
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