What does the concept of 'time value of money' imply?

The concept of 'time value of money' is fundamentally based on the idea that a specific amount of money today has greater value than the same amount in the future. This principle arises from the opportunity to invest or use that money for earning potential, which can increase its worth over time due to interest or return on investment. When you have money today, you have the opportunity to grow that amount through investments, saving it in interest-bearing accounts, or other financial avenues.

The rationale is tied to factors such as inflation, interest rates, and the ability to generate returns over time. Essentially, each dollar received today can be invested to earn additional income, whereas a dollar received in the future lacks that immediate earning potential. Therefore, the correct interpretation of the time value of money accurately reflects the higher worth of money in the present compared to its future equivalent.