To compare cash flows across time, you must adjust them to the same point in time using present value. Is it always necessary to convert all cash flows to beginning-of-year dollars?

To compare cash flows across time, you must adjust them to the same point in time using present value. Is it always necessary to convert all cash flows to beginning-of-year dollars?

• A. True
• B. False
• C. Sometimes
• D. Only for taxes

Answer: (B)

The key idea is time value of money: to compare cash flows that occur at different times, you bring each one to a single reference date using present value (or future value) with a consistent rate. You don’t have to convert everything to beginning-of-year dollars. That is just one possible reference point. In practice, you typically discount to today (time 0), but you could choose any common date as long as every cash flow is adjusted to that same date with the same discounting rate. If cash flows happen at end of years, you’d ordinarily discount to today; if you wanted to, you could instead discount to the beginning of a particular year, but you must be consistent. So it’s not always necessary to convert to beginning-of-year dollars.

The key idea is time value of money: to compare cash flows that occur at different times, you bring each one to a single reference date using present value (or future value) with a consistent rate. You don’t have to convert everything to beginning-of-year dollars. That is just one possible reference point. In practice, you typically discount to today (time 0), but you could choose any common date as long as every cash flow is adjusted to that same date with the same discounting rate. If cash flows happen at end of years, you’d ordinarily discount to today; if you wanted to, you could instead discount to the beginning of a particular year, but you must be consistent. So it’s not always necessary to convert to beginning-of-year dollars.