Capital budgeting decisions require analyzing business cash flows often spanning years. Accounting for the time value of money is essential in these analyses.
“A bird in the hand (today) is worth two in the bush (tomorrow).” Now you know most of what you need to know about the time value of money. It is intuitive.
Everybody would rather have a dollar in his or her pocket today than to receive a dollar far into the future. Finance types say that today’s dollar is worth more—that it has more value—than a dollar received tomorrow. The rest of this chapter will answer the questions “Why so?” and “How much?”