Which statements describe time value of money?

The time value of money (TVM) refers to the principle that money available now is worth more than the same amount in the future due to its potential earning capacity, inflation, and opportunity costs. Below are key statements that describe TVM:

Correct Statements:

1. "A dollar today is worth more than a dollar tomorrow because it can be invested to earn a return."
   This captures the core idea of TVM: current funds can generate returns (e.g., interest, dividends), making them more valuable than the same future amount.

2. "The time value of money accounts for inflation, which reduces purchasing power over time."
   Inflation erodes the value of currency, so future dollars buy less than present dollars, a key driver of TVM.

3. "Opportunity cost is a critical component of TVM."
   The value of waiting to receive money today includes the forgone benefits of using those funds now (e.g., investing in a project), which is the opportunity cost.

4. "TVM is calculated using tools like present value (PV) and future value (FV)."
   These calculations explicitly incorporate the time value by discounting future cash flows to their present value or compounding present values to future amounts.

Incorrect Statements (for contrast):

• "A dollar in the future is worth more than a dollar today if you can invest it now" (reverse of TVM).
• "TVM only applies when there is no inflation" (TVM also accounts for investment returns and opportunity costs).

For specific exam questions, always verify with your instructor, as phrasing may vary.