Time Value of Money:
Learning Objectives:
 Explain the concept of time value of money.
 Why time value of money concept is important in capital budgeting analysis?
Explanation of of the Concept of Time Value of Money
Investments commonly involve returns that extend over fairly long period of time.
Therefore, in approaching capital budgeting decisions, it is necessary to employ techniques that recognize the time value of money.
“A dollar today is worth more than a dollar a year from now”
The same concept applies in choosing between investment projects. Those projects that promise earlier returns are preferable to those that promise later retunes. The capital budgeting techniques that recognize the above two characteristics of business investments most fully are those that involve discounted cash flow. Two approaches to making capital budgeting decisions use discounted cash flows. One is the net present value methodand other is internal rate of return method.
You may also be interested in other articles from “capital budgeting decisions” chapter:
 Capital Budgeting – Definition and Explanation
 Typical Capital Budgeting Decisions
 Time Value of Money
 Screening and Preference Decisions
 Present Value and Future Value – Explanation of the Concept
 Net Present Value (NPV) Method in Capital Budgeting Decisions
 Internal Rate of Return (IRR) Method – Definition and Explanation
 Net Present Value (NPV) Method Vs Internal Rate of Return (IRR) Method
 Net Present Value (NPV) Method – Comparing the Competing Investment Projects
 Least Cost Decisions
 Capital Budgeting Decisions With Uncertain Cash Flows
 Ranking Investment Projects
 Payback Period Method for Capital Budgeting Decisions
 Simple rate of Return Method

Post Audit of Investment Projects
 Inflation and Capital Budgeting Analysis
 Income Taxes in Capital Budgeting Decisions
 Review Problem 1: Basic Present Value Computations
 Review Problem 2: Comparison of Capital Budgeting Methods
 Future Value and Present Value Tables
Other Related Accounting Articles:
 Typical Capital Budgeting Decisions
 Definition and Explanation of Capital Budgeting
 Postaudit of Investment Projects
 Ranking Investment Projects – The Preference Decisions
 Internal Rate of Return (IRR) Method in Capital Budgeting Decisions
 Capital Budgeting Decisions With Uncertain Cash Flows
 Payback Period Method for Capital Budgeting Decisions
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