How management used the concept of the time value of money principles

Module Overview

The real value of a dollar in your hand today is much more than what you will earn after a year. Why is it so? It is the value of time.

Imagine you won a cash prize worth $50,000 and you can choose to receive your payment either now or two years later. Which option would you choose? Instinctively, you would not want to wait for two years when you can get the same amount now. By receiving the $50,000 now, you will be able to increase its future value (FV) by gaining interest over a period of time if you placed it in an interest-bearing bank account. If you choose to receive the cash prize two years later, the amount will be the same—$50,000.

So how do you calculate how much more the first option is worth as compared to the second option?

In this module, you will learn about the concepts of present value (PV), FV, and compound interest and how you can use these concepts as business valuation tools to make day-to-day investment decisions.

In business, time value of money is one of the most important concepts used to make various financial decisions. This concept becomes critical for you as a manager, especially, if you contemplate raising capital, expanding operations or product offerings, selling a portion or all of the business, or merging with other organizations. Understanding time value of money will help you assign value to all aspects of your business operations, and recognize the level of risk and the expected return.

Module Readings

Complete the following readings early in the module:

  • Module 3 overview
  • From your course textbook, Managerial economics: Economic tools for today’s decision makers, read the following chapters:
    • Capital Budgeting and Risk

Assigned Reading:

  • From the Argosy University online library resources, read:
    • Lawler, E. E., III, & Toole, E. (Eds.). America at work: Choices and challenges. Gordonsville, VA: Palgrave Macmillan. Retrieved from http://site.ebrary.com.libproxy.edmc.edu/lib/argosy/docDetail.action?docID=10150440
    • McGrath, R. G., & MacMillan, I. C. (2009). How to rethink your business during uncertainty. MIT Sloan Management Review, 50(3), 25–30. (ProQuest Document ID: 224971863) http://search.proquest.com.libproxy.edmc.edu/docview/224971863?accountid=34899

Assignment: Discussion—Value of Money

Business decisions are based on the time value of money. Bonds, stocks, loans, and other business investments are valued by determining the present value of an expected cash flow, which is also called discounting the cash flow. The time value of money finds considerable application in the decision-making processes of a business.

In this assignment, you will apply the basic principles of the time value of money to business decisions.

Tasks:

Part 1:

You are the chief financial officer of a firm. The firm has an expected liability (cash outflow) of $2 million in ten years at a discount rate of 5%.

  • Calculate the amount the firm would need on the present date as savings to cover the expected liability.
  • Calculate the amount the firm would need to set aside at the end of each year for the next ten years to cover the expected liability.

Part 2:

Using the Argosy University online library resources, identify an article that demonstrates the application of time value of money principles to a business decision.

  • Explain the specific business decision that management made after computing this value. Analyze how management used the concept of the time value of money principles to make this decision.
  • Analyze factors other than the time value of money that management considered or should have considered in reaching the business decision.

Submission Details:

post your responses in a minimum of 500 words to this Discussion Area. Support your assumptions with reputable source material. While responding, consider the implications for the firms selected in applying the concept of the time value of money, such as present value (PV) and future value (FV). What would happen if the firms do not apply the concepts of the time value of money to their finances?

Write your initial response in 300–500 words.   turned-in on time, Grading criteria followed All assignment qualifications addressed correctly, Grading Criteria followed, Include Question followed by the answer  Reference Page Included Cover page Included, Paragraphs  Indented,  Running-head included, main heading should be centered; all  new  paragraphs should be indented;  paper should be right ragged,   not right justified; references,  should always go on a standalone  page. abstracts are not usually indented; acronyms should be spelled out when using them  for  the first time, for example HR. references as listed are APA  standard.   When you  submit your papers through turnitin.com, your overall  similarity  index  score should not be exceedingly high, with   ten to  fifteen percent  being  the maximum,  Please make sure your APA  formatting of citations. I have provided the  APA resource cite for you. https://owl.english.purdue.edu/owl/resource/560/01, Please work on using literature within the span of the last 5 years,  keep in mind there should not be any one, two, or three sentence  paragraphs

Your response should be thorough and address all components of the discussion question in detail, include citations of all sources, where needed, according to the APA Style, and demonstrate accurate spelling, grammar, and punctuation.

Do the following when responding:

  • Read your answers.
  • Provide substantive comments by
    • contributing new, relevant information from course readings, Web sites, or other sources;
    • building on the remarks or questions; or
    • sharing practical examples of key concepts from your professional or personal experiences
  • Respond to feedback on your posting and provide feedback to their ideas.
  • Make sure your writing
    • is clear, concise, and organized;
    • demonstrates ethical scholarship in accurate representation and attribution of sources; and
    • displays accurate spelling, grammar, and punctuation.
  • Grading Criteria:

Quality of initial posting, including fulfillment of assignment instructions

Reference to supporting readings and other materials

Language and grammar

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