Rahaaikaarvo

Rahaaikaarvo, often translated as the time value of money (TVM), is a fundamental financial concept that states that a sum of money is worth more now than the same sum will be in the future. This is due to its potential earning capacity, a principle rooted in the concept of opportunity cost. If one has money today, they can invest it and earn a return, making it grow over time. Conversely, waiting to receive money means forfeiting that potential growth.

The core idea behind rahaai kaarvo is that inflation and investment opportunities influence the purchasing power and potential value of money. Inflation erodes the value of money over time, meaning that a certain amount of money will buy less in the future than it can today. Investments, on the other hand, offer the possibility of increasing the value of money.

Key factors influencing rahaai kaarvo include the interest rate or discount rate, the time period, and the compounding frequency. A higher interest rate or discount rate increases the present value of future money, while a longer time period also makes future money less valuable in today's terms. Compounding, the process of earning interest on already earned interest, further amplifies these effects. Understanding rahaai kaarvo is crucial for making informed financial decisions, such as evaluating investment opportunities, calculating loan payments, and planning for retirement. It underpins many financial calculations, including net present value (NPV), internal rate of return (IRR), and annuity calculations.