What does the time value of money principle primarily about in investment evaluation?

• A. A dollar today is worth less than a dollar tomorrow.
• B. A dollar today is worth more than a dollar received in the future, and it underpins discounting future cash flows.
• C. Time value is only relevant for stocks.
• D. Time value ignores earning potential.

Answer: (B)

Money today is more valuable than the same amount in the future because it can be invested to earn a return. In investment evaluation, this leads us to discount future cash flows back to their present value, reflecting the opportunity cost of not having the money now and the potential earning foregone by waiting.

That’s why the statement stating a dollar today is worth more than a dollar received in the future, and that this concept underpins discounting future cash flows, is the best description. The other ideas are incorrect because they reverse the principle, claim it only matters for stocks, or say it ignores earning potential, all of which contradict the fundamental notion that money has earning potential over time.