Explain how the accounting process can be used for a long-term project's cash flows that are spread out over a number of years.
What will be an ideal response?
Answers will vary. One of the most challenging aspects of the evaluation of a long-term project's cash flows is that they are spread out over a number of years. When financial managers compare cash flows that occur at different times, they must take the time value of money into account. The time value of money reflects the fact that, from a financial manager's perspective, a dollar received today is worth more than a dollar received in the future because the sooner you receive a sum of money, the sooner you can put that money to work to earn even more money. Because money has a time value, a cash flow's value depends not only on the amount of cash received but also on when it is received. Financial managers compare cash flows occurring at different times by converting them to their present values. The present value of a cash flow received in a future time period is the amount of money that, if invested today at an assumed rate of interest (called the discount rate), would grow to become that future amount of money.
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a. True b. False Indicate whether the statement is true or false
Answer the following statement(s) true (T) or false (F)
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