Concept Architecture
Concept
Theoretically, the Time Value of Money is the economic principle that a sum of money available today is worth more than the same nominal amount received in the future because it can be invested, earn returns and compensate for time preference and uncertainty. It is a fundamental concept in finance and welfare economics and provides the theoretical basis for discounting future monetary costs and benefits. In health economics, the time value of money underlies the present value calculations used in economic evaluation and investment appraisal.
Mathematically, the Time Value of Money is represented through discounting and compounding formulae that convert values between different points in time using an appropriate discount or interest rate. These formulae enable future costs and benefits to be expressed on a common present-value basis for valid comparison.
In practice, the Time Value of Money is applied when evaluating healthcare investments, cost-benefit analyses, budget impact assessments and long-term economic models. Future monetary costs and savings are discounted using nationally recommended social discount rates or other appropriate rates specified by the evaluation perspective.
Purpose
Used to recognise that monetary values occurring at different points in time are not directly comparable and to convert future costs and benefits into equivalent present values for economic evaluation.
Mathematical Formulae
Primary Formula
Present value:
PV = FV / (1 + r)?
where:
- PV = present value
- FV = future value
- r = discount or interest rate
- t = number of time periods
Supporting Formulae
Future value:
FV = PV(1 + r)?
Discount factor:
DF? = 1 / (1 + r)?
Related Mathematical Methods
- Present Value
- Future Value
- Discounting
- Net Present Value
- Internal Rate of Return
- Discounted Cash Flow Analysis
Example
A hospital expects to incur a maintenance cost of �1,000,000 in five years' time. Using a discount rate of 3.5%:
PV = 1,000,000 / (1.035)? = �841,973
The future maintenance cost is therefore equivalent to approximately �841,973 in present-value terms.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
| PV | =PV(3.5%,5,0,-1000000) | Calculates the present value of future healthcare costs or benefits |
| FV | =FV(3.5%,5,0,-841973) | Calculates the future value of a present monetary amount |
| NPV | =NPV(3.5%,B2:B10) | Discounts multiple future cash flows |
| POWER | =B2/(1+$C$1)^A2 | Manually applies the time value of money using discounting |
VBA (Optional)
Automate present-value and future-value calculations for healthcare investment appraisals and long-term economic evaluations.
Sources
- Brealey RA, Myers SC, Allen F. Principles of Corporate Finance.
- Ross SA, Westerfield RW, Jordan BD. Fundamentals of Corporate Finance.
- Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
- Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation. Oxford University Press.
- NICE. Health Technology Evaluations: The Manual.
Related Concepts (2)
Library
Publications
1
Methods for the Economic Evaluation of Health Care Programmes — Drummond, Sculpher, Claxton, Stoddart & Torrance, 4th Edition ed., 2015 (Oxford University Press)
The standard international reference text for economic evaluation methods in health care, covering cost-effectiveness, cost-utility and cost-benefit analysis, measurement of costs and outcomes, evidence synthesis, and the characterisation of uncertainty.
BookView source →
Frequently Asked Questions (6)
What is the time value of money?
The principle that a given sum of money is worth more today than the same sum received in the future.
Source: Brealey, Myers & Allen 2019
What does the time value of money mean?
The time value of money is the principle that a sum available now is worth more than the same sum received later, because money in hand can be put to use and earn a return in the interim. A payment deferred therefore carries an opportunity cost equal to the return forgone while it is awaited. The principle underlies the practice of expressing sums arising at different dates in comparable terms before they are added or compared, which is done through discounting to a present value.
Source: Brealey, Myers & Allen 2019
Why does the time value of money matter in costing?
Health programmes commonly incur costs and produce savings over several years, and the time value of money means these cannot be summed at face value across dates. A cost falling in ten years imposes a smaller present sacrifice than the same cost today, because the resources could earn a return in the meantime. Recognising this, cost analyses discount future amounts to present value so that a stream of expenditure is represented by a single figure reflecting when each amount actually occurs.
Source: Drummond et al. 2015
How is the time value of money expressed in calculations?
It is expressed through discounting, which converts a future amount to its present value by dividing it by a compounding factor based on the rate and the number of periods. A stream of amounts across years becomes a set of present values that can be summed, giving the amount today judged equivalent to the whole stream. The same relationship run in reverse gives a future value, showing what a present sum would grow to. The rate applied determines how heavily later amounts are reduced.
Source: Brealey, Myers & Allen 2019
How does the time value of money differ for costs and for health?
The principle rests on money's capacity to earn a return, which applies directly to costs but not straightforwardly to health, since a unit of health cannot be invested to produce more health. This raises the question of whether health outcomes should be discounted on the same basis as money. Analysts generally still discount health, citing time preference rather than an investment return, but the weaker analogy is why the discounting of health attracts dispute that the discounting of money does not.
Source: Drummond et al. 2015
How is the time value of money reflected in the discount rate?
The discount rate is the figure that puts the time value of money into effect, setting how much a future amount is reduced to reach its present value. A higher rate implies a stronger preference for present over future resources and reduces the weight given to amounts arising later. In public appraisal the rate is specified centrally rather than chosen for each analysis, so that the time value of money is applied consistently across proposals rather than varying with the analyst.
Source: HM Treasury, The Green Book 2022
Trust Record
Verified by Dr Darrin Baines
British health economist
Professional identity: darrinbaines.org
Verification date: 30 Jul 2025
Content version: 1.0.0
Canonical Identity
- Persistent URI
- https://healtheconomics.wiki/concept/time-value-of-money
- Term code
- HE-EE-CA-082
Stable URI · Machine-readable · Resolvable · CC BY 4.0