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CMA Intermediate · Financial Management and Business Data Analytics · Time Value of Money

Which statement best explains why a rupee received today is preferred to a rupee received a year later, in the concept of time value of money?

A rupee today is worth more because it can be invested to earn a return, it avoids loss of purchasing power from inflation, and it removes the risk that a future receipt is delayed or not received. These factors together form the basis of time value of money.

  1. AFuture receipts are always certain, so they need no adjustment
  2. BMoney received today can be invested to earn a return, and it also avoids inflation and risk of delayCorrect
  3. CRupee value rises with the passage of time due to compounding of inflation
  4. DDiscounting is only a legal requirement and has no economic basis

Explanation

Time preference rests on earning opportunity, inflation eroding purchasing power and risk of uncertainty in future receipts. Money in hand can be invested to earn a return, so it is worth more than the same nominal sum later. The other options contradict this, for example inflation reduces rather than raises purchasing power.

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