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Challenges in advanced management accounting
Challenges in advanced management accounting

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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.