The statement that projects promising future returns are preferred over projects promising earlier returns due to the concept of time value of money is true. Here's why:
1. **Time Value of Money**: The time value of money is a fundamental financial concept that states that a dollar today is worth more than a dollar in the future. This is because money can be invested to earn interest or returns over time.
2. **Present Value**: When comparing projects with different timing of returns, investors use present value calculations to determine the current worth of future cash flows. This involves discounting future cash flows back to their present value using an appropriate discount rate.
3. **Preference for Future Returns**: Projects promising future returns are preferred over those promising earlier returns because the concept of time value of money allows investors to assess the profitability of each project on a comparable basis. By discounting future cash flows, investors can evaluate projects based on their net present value, considering the timing and magnitude of cash flows.
In conclusion, the concept of time value of money influences investment decisions by favoring projects that offer higher future returns over those with earlier returns, as it enables investors to make informed choices based on the present value of future cash flows.
