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"Which ONE of the following BEST describes WHY the time value of money is important in capital budgeting decisions?"

A. Approval for significant cash outflows takes time because that approval must come from the board of directors.
B. Cash inflows and outflows occur over an extended period of time.
C. In terms of sequencing, employees must be paid before investors receive cash flows.
D. In terms of sequencing, creditors must be repaid before investors receive cash flows.

Sagot :

GinnyAnswer

Final answer:

The time value of money is crucial in capital budgeting decisions as it allows for comparing funds spent now to income earned later, using the Net Present Value of Discounted Cash Flow.


Explanation:

The time value of money is crucial in capital budgeting decisions because it allows for the comparison of funds spent now to income earned later through a concept called Net Present Value of Discounted Cash Flow.

When considering capital investments that generate income over time, interest rates play a key role in linking payments distributed across time. The present value of future payments is determined by discounting them using the interest rate, reflecting that a payment in the future is worth less than an equal payment today.

By understanding the time value of money, businesses can accurately assess the profitability and value of investments, ensuring informed decision-making in capital budgeting.


Learn more about Time value of money in capital budgeting decisions here:

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