The time value of money refers to the idea that a certain sum of money today is worth more than a similar amount in the future. It explains why financial institutions loan money to borrowers who will be expected to pay a higher amount in the future due to interest rates. The time value of money affects the evaluation of organizational alternatives through capital budgeting (Peterson and Fabozzi, 2014). This concept is essential in making business decisions about which projects to pursue. Capital projects require significant investments; thus, the present value of money affects the future projects’ success. Therefore, since the cash flows will be attained, organizations must convert them into current value for present costs comparisons. Besides, companies are faced with multiple projects to invest in; thus, the time value of money concept will be utilized to determine the most favorable plan. This concept is applied in evaluating business alternatives through cost-benefit analysis (Drake and Fabozzi, 2019). Decisions involving money in an organization require an analysis of the expected costs and benefits. For example, when evaluating two competing projects, a business should compare each project’s total estimated value based on the net present value.

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