3.3 Why does the value of money depend on time?
Money has time value for several reasons:
- the risk that cash flows do not take place in the future
- the loss of the flexibility to use money for more profitable projects, if such opportunities arise while the money is invested in an ongoing project
- the loss of value of money due to inflation
- the opportunity cost of alternative investments (such as in gilts, bonds, or other shares).
These can be divided into two types of reasons: underlying ones about risk and flexibility, and ones involving comparisons with the potential rates of return from alternative investments.