What does the time value of money principle state?

The time value of money principle posits that a dollar today is worth more than a dollar in the future due to its potential earning capacity. This concept is foundational in finance because it recognizes that money available now can be invested to earn a return, leading to greater wealth accumulation over time. The principle is influenced by factors such as interest rates and inflation; a dollar can grow if invested, while inflation erodes purchasing power, making future cash less valuable in real terms.

Investors and financial decision-makers must consider this principle when evaluating investment opportunities, assessing the present value of future cash flows, and making financing decisions. By understanding that money's value is not static, individuals and businesses can make more informed choices about savings, investments, and financial planning.