Certified Financial Management Specialist Practice Exam

The concept of time value of money implies that?

1. Cash now is worth more than cash in the future

2. Future money can be inflated

3. All cash flows are equal over time

4. Interest rates are fixed and unavoidable

The correct answer is: Cash now is worth more than cash in the future

The concept of time value of money fundamentally states that a dollar received today is worth more than a dollar received in the future. This principle is rooted in the potential earning capacity of money; if you have cash now, you can invest it to earn a return, leading to an increase in its value over time. This is why immediate cash flow is regarded as more valuable than the same amount of cash at a later date, due to the opportunities for investment and the effects of inflation. Understanding this concept is crucial in various financial decisions, including investment analyses, loan calculations, and retirement planning, as it guides individuals and businesses in evaluating the trade-offs of receiving money in the present versus the future. Other choices would suggest different interpretations that do not capture this fundamental idea effectively, leading to incorrect conclusions about the nature of money over time.