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The financial concept of "the time value of money" is now in the spotlight, thanks to President Donald Trump's complaint regarding the presentation of alleged tax schemes that have strengthened his fortune in the New York Times.
The article claims that Mr. Trump has received much more wealth from his father than he has disclosed – $ 413 million in current dollars, according to the Times' accountancy. On Wednesday, Mr Trump criticized the article for what he claims to be the use of "the time value of money," among other complaints.
Although the exact nature of Mr. Trump 's objection is unclear, a closer look at the concept of the time value of money suggests what he might want to come to about it.
What is the time value of money?
The time value of money is the idea that money in hand is worth more than the same amount of money in the future. In other words, $ 1,000 represents more for an investor now than in a month, a year or another period because he can start generating an immediate return. This interest will increase over time, increasing the value of the original $ 1,000.
The concept is quite intuitive, because all those who invest can understand that the money available to be used now has the potential to generate a return higher than the one they have yet to spend.
How is it used in business?
On the one hand, the time value of money underlines much of Wall Street's modeling and financial forecasting. The concept is familiar to majors in economics and business school students. among others. According to Business Insider, it is one of the most important concepts learned by business school graduates.
The time value of money is also at the heart of concepts such as discounted cash flow analysis, standard financial technique used to determine whether an investment – including real estate, the strong point of Mr. Trump – will be profitable over time.
How did the New York Times use it?
Mr. Trump seems to be referring to the New York Times' use of inflation-corrected figures. For example, the Times claims that his father would have lent him at least $ 60.7 million, or $ 140 million today, after adjusting for inflation. This is far from the $ 1 million loan that Mr. Trump previously stated to have received from his father.
Since inflation changes the value of money over time, it is common to adjust its impact to ensure an apple-to-apple comparison of one year at a time. other. But this is not the same as the time value of money, which refers to the investment potential of money over time.
As a result, some of the experts went on to question what exactly Mr. Trump was referring to.
"The time value of money" does not refer to inflation, writes Patrick Chovanec, managing director of Silvercrest Asset Management, on Twitter. carrying assets (such as US Treasuries) for a period of time. It's the opportunity cost that I pay if I do something else with my money. "
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