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Time Value of Money

Why Timing Matters

Money received today is worth more than the same amount received in the future because today's money can be invested to earn returns. Capital budgeting methods that account for this concept are generally more reliable.

  • Future cash flows are discounted to present value.
  • Higher risk generally requires higher discount rates.
  • Longer delays reduce present value.

A dollar today is worth more than a dollar tomorrow.

Summary
The time value of money is a fundamental principle underlying modern capital budgeting techniques.