Time-value of money
Time-value of money is the common description for the general rule that cash in hand today is worth more than the same amount of cash in the future. The concept of the time-value of money is used for investment decisions.
Two factors typically contribute to the time-value of money.
- In a period of inflation, cash will have lower purchasing power in the future.
- The cash could always be invested in a risk-free alternative instead of the investment under consideration. The interest that you would receive from the risk-free choice is a baseline. Any other investment must be compared against that baseline.
The time-value of money is often expressed as an interest rate or a hurdle rate. The investment must earn money at better than the hurdle rate or it should be rejected.
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