Question

Explain and discuss the importance of time value of money when evaluating different investments or capital expenditures.

Answer 1

Time value of money is an important concept and it would be advocating that the similar value of money today will be having a higher worth than the similar value of the money tomorrow due to the concept of time value of money which will advocate the value of money will depreciate due to high amount of inflation and other macro factors that would be leading to loss of the disposable value of the money.

When it is applied in contact with capital expenditure or different investment decision-making, we are trying to discount the cash flows which are accruing to the company in the long run, and we will be trying to discount cash flow at the present value in order to make a decision about whether to accept the project if there is a positive net present value of project after being discounted at present rate, so we can make the decision accordingly with the time value of money concept and it will be helpful in order to discount the money according to the true value after being discounted with factors like inflation and money depreciation.