Which theory do investment analysts use to account for the changes in the value of a sum of money over time?

Which theory do investment analysts use to account for the changes in the value of a sum of money over time?

• A. Future value theory
• B. Present value theory
• C. Net present value theory
• D. Real value theory

Answer: (B)

Present value theory is utilized by investment analysts to evaluate the current worth of a sum of money that will be received in the future, taking into consideration the time value of money. This theory operates on the principle that a specific amount of money today is worth more than the same amount in the future due to its potential earning capacity. When analyzing potential investments, present value calculations help analysts determine how much future cash flows are worth in today’s terms. By discounting future cash flows back to the present using an appropriate discount rate, they can estimate the attractiveness of an investment and make informed decisions based on the present value of future returns. This is particularly crucial when comparing different investment options or assessing the viability of projects with cash inflows occurring over time. Other theories listed may have their applications but do not specifically address the valuation of future sums in terms of today's dollars as effectively as present value theory does.

Present value theory is utilized by investment analysts to evaluate the current worth of a sum of money that will be received in the future, taking into consideration the time value of money. This theory operates on the principle that a specific amount of money today is worth more than the same amount in the future due to its potential earning capacity.

When analyzing potential investments, present value calculations help analysts determine how much future cash flows are worth in today’s terms. By discounting future cash flows back to the present using an appropriate discount rate, they can estimate the attractiveness of an investment and make informed decisions based on the present value of future returns. This is particularly crucial when comparing different investment options or assessing the viability of projects with cash inflows occurring over time.

Other theories listed may have their applications but do not specifically address the valuation of future sums in terms of today's dollars as effectively as present value theory does.