Financial Management: Present Value Calculation

Consumption Preference, which states that individuals prefer current consumption to future consumptions, is one of the factors responsible for the time value of money. This principle is based on the idea that people would need to be offered more in the future to give up current consumption.

Inflation is a general increase in prices, which erodes the purchasing power of money. This means that the value of money decreases with time when there is inflation, making it a factor that contributes to the time value of money.

The opportunity cost of receiving cash today versus receiving it in the future is the additional income that could be earned if the cash were invested today. This is a factor in the time value of money, as it demonstrates that having money now is more valuable than having it later.

Uncertainty or risk associated with future cash flows makes them less valuable than current cash flows, as future cash flows have risks such as default risk. This implies that individuals want to be rewarded for assuming additional risk, which contributes to the time value of money.

The fundamental concept that explains why it is better to have money now than later is the time value of money, which demonstrates that having money now is more valuable than having it later due to factors such as consumption preference, inflation, uncertainty, and investment opportunities.