The time value of money is the principle that a certain amount of money today has a different buying power (value) than the same currency amount of money in the future. The value of money at a future point of time would take account of interest earned or inflation accrued over a given period of time. This notion exists both because there is an opportunity to earn interest on the money and because inflation will drive prices up, thus changing the "value" of the money.
For example, assume that an investor has $100 today and can invest this money at a 5% return for one year. A year from now the original investment will equal $105, (100)*(1.05). The return of $5 represents the time value of money over the one year interval .
Money
Assuming a 5% interest rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from now is only worth $95.24 today ($100 divided by 1.05), assuming a 5% interest rate.
Time value of money: (1 + r)t x (the value of the initial investment) = future value; where r is the annual interest rate and t is the number of years.
Alternatively, if an investment is valued at $125 and this value includes the 7% return generated over a one year time horizon, the original value of the investment or its present value is equal to (125)/(1.07) or 117.
Present value: (the value of the investment at a future time)/(1 + r)n; where r is the annual interest rate and n is the number of years the investment has occurred.
The time value of money is the central concept in finance theory. However, the explanation of the concept typically looks at the impact of interest and assumes, for simplicity, that inflation is neutral.