[Rosaryar]

Why is the time value of money so important in capital budgeting decisions?
I read the policy on homework questions, and I have searched the accounting and finance questions without finding this. So I have answered the question but need assistance in finding out if I've covered it.

Thank you~

Budgeting is a crucial component in the management process having direct impact on long-run and short-run planning. Once a company has its strategic plan in place, they can then plan for the purchase of assets such as buildings or equipment to aid the company in reaching its long-term goals. It is then time for management to determine how best to utilize their capital to maximize profit. Time is money, and that popular phrase is no more significant when it comes to capital budgeting decisions of large corporations. Failure to carefully perform planning, capital budgeting or budgeting for operations can have extensively damaging consequences for organizations, to the point of bankruptcy for some. This list grows consistently. The time value of money is an essential measure of cost/benefit tradeoffs of potential projects. This term is based on the premise that an investor would rather receive a payment of a fixed amount of money today, rather than an equal amount in the future, as if payment is received today, interest can be earned on the funds until the specified future date.

[morgaine300]

You READ the homework policy? Really? I think I'm going to faint! ;)

This really does belong in the acct/finance homework area. And yes, the question does exist there as I've seen it several times. You aren't likely to find an answer to it, partly because I've never seen anyone attempt to answer it, and we don't just answer homework for people. (Most don't read that policy.) And partly cause there's not a whole lot of finance people hanging around. I'm more accounting than finance, though I know time value of money pretty well, though I don't know capital budgeting in any great detail. But I'm going to address what of this that I can.

Time is money, and that popular phrase is no more significant when it comes to capital budgeting decisions of large corporations.

You're applying the term wrong. "Time is money" means that time taken up is costing money. That's not what time value of money means. i.e. it's not a matter that time is taken up and therefore it's costing money. It's what the value of money does over time. Two different things.

The time value of money is an essential measure of cost/benefit tradeoffs of potential projects.

While this is a true statement, you still are not really delving into what time value of money actually is. That is, WHY? You've never answered why.

This term is based on the premise that an investor would rather receive a payment of a fixed amount of money today, rather than an equal amount in the future, as if payment is received today, interest can be earned on the funds until the specified future date.

Well, you're getting warm here, but you're not really showing how this relates to the cost/benefit trade off. (You're relating the two by saying this.) There's really nothing in your paragraph that says how time value of money actually applies to capital budgeting, though you've wormed your way around the fact that it's important, etc. But you haven't actually gone specifically into time value of money, other than one vague statement that an investor can earn interest on funds. But that's one fairly flimsy statement that doesn't really explain the concept of why this is important in capital budgeting.

So my question to you is: do you actually know what time value of money is and what that means? You're not showing that you do here. Or at least, it appears to me that you have a vague concept but don't really understand it. And it shows. Which methinks is not what you're trying to accomplish when turning in your homework, right?