Question

6) The main idea behind the time value of money is that: 6) _______

A) cash received in year 3, say, $80,000, has the same value as $40,000 received in year 3 plus $40,000 received in year 4.

B) cash payments made in the future have the same value as payments made today.

C) cash flows received in the distant future are less valuable than cash flows received in the near-term future.

D) cash flows received in different years are treated as equal in value.

E) timing considerations of cash flows have little value in decision making.

Answer 1

Correct answer---(c) cash flows received in the distant future are less valuable than cash flows received in the near term future.

Explanation

Present value of money works on the fact that value of money decreases when time passes. Cash received today has higher value than cash received in future.

A proper discounting factor is used to calculate discounted cash flow which is also known as present value of money.

Value of cash continues to decrease with the passage of time.