Which concept explains why a dollar received today is worth more than a dollar to be received in the future?

Which concept explains why a dollar received today is worth more than a dollar to be received in the future?

• A. Time value of money
• B. Inflation
• C. Nominal value
• D. Present value of cash flows

Answer: (A)

Time value of money is the idea that a dollar today can be invested to earn a return, so its value grows over time. Because you could put that dollar to work now, receiving it in the future means you miss out on that potential earning, which makes the future dollar worth less in today’s terms. Inflation affects purchasing power, but the main driver is the opportunity to earn a return and the cost of waiting. Present value of cash flows is the method used to calculate how much future dollars are worth today, but the underlying concept is the time value of money.

Time value of money is the idea that a dollar today can be invested to earn a return, so its value grows over time. Because you could put that dollar to work now, receiving it in the future means you miss out on that potential earning, which makes the future dollar worth less in today’s terms. Inflation affects purchasing power, but the main driver is the opportunity to earn a return and the cost of waiting. Present value of cash flows is the method used to calculate how much future dollars are worth today, but the underlying concept is the time value of money.