According to the time value of money, a dollar in the present time is worth more than a dollar in the future. Variables like inflation (v) and interest rate (r) affect the value of money. Inflation means a rise in the price level which depreciates the currency value over time, whereas interest rate is used as a discounting factor. If the sum of $1,000 is leave-in cash as it is, then its value will depreciate because of inflation. If the same amount is deposited in a bank as saving, then the bank will pay some interest on that amount balancing it with the inflation.
Suppose, if the sum of $1,000 received now is deposited in a bank for 1 year, and the interest rate that bank is offering is around 7% . This means, r=7%=0.07. So, the interest amount after 1 year will be,
$1000+r+1,000=1+r×$1000That is,0.07+1×$1000=1,070Therefore, $1,070-$1000=$70interest amount
Hence, the sum of $1000 received today will have a value of $70 more than the sum of $1000 received 1 year after.