5.1 The Role of Time Value in Finance

  1. LG1

The time value of money refers to the observation that it is better to receive money sooner than later. You can invest money you have in hand today to earn a positive rate of return, producing more money tomorrow. For that reason, a dollar today is worth more than a dollar in the future. In business situations, managers constantly face tradeoffs when actions that require cash outflows today may produce cash inflows later. Because cash that comes in the future is worth less than cash that firms spend up front, managers need a set of tools for comparing cash inflows and outflows that occur at different times. Individuals can use those tools also when making decisions about investing or borrowing money. ...

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