Which concept is often used to assess the value of cash flows over time?

The time value of money is a fundamental concept in finance that emphasizes the idea that a sum of money has a different value depending on when it is received or paid. This principle asserts that a dollar today is worth more than a dollar in the future due to its potential earning capacity. Essentially, it incorporates the idea that cash flows can earn interest and therefore grow over time.

By using the time value of money, financial analysts and managers can compare cash flows that occur at different times and assess their present value or future value. This makes it a critical tool for evaluating investments, making decisions regarding loans, and understanding the cost of capital. For example, when assessing a series of cash flows from a project or investment, one must consider when those cash flows will occur and discount them to their present value to accurately evaluate potential returns.

While net present value (NPV) also incorporates the time value of money, it is a specific application of this concept used to evaluate investments by calculating the present value of future cash flows minus initial investment costs. Therefore, the broader principle that underlies NPV is the time value of money, making it the most appropriate choice in this context.