CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Which of the following best explains why a rupee received today is considered more valuable than a rupee received one year from now?
A rupee today is worth more because it can be invested to earn interest, it is not yet eroded by inflation, and it is certain. Future receipts are uncertain and have lower purchasing power, so they are worth less in present terms.
- AToday's rupee can be invested to earn a return, and future receipts carry risk and lose purchasing powerCorrect
- BFuture rupees are always legally worth less than present rupees
- CBanks only accept deposits made today
- DTax is charged only on future receipts
Explanation
Time value of money rests on three ideas: money can earn a return if invested now, inflation erodes purchasing power, and future receipts are uncertain. The other options state things that are not general principles of finance.
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