# M3 (SW) Response

M3 (SW) Response
NEED FOLLOW-UP RESPONSE (IT ONLY NEEDS TO BE 2-3 PARAGRAPHS WITH 1 REFERENCE)
ORIGINAL QUESTION:
Assignment 1: 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.
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.
STUDENT RESPONSE:
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.
The present date as savings to cover the expected liability is \$1.23 million. The formula is P.V.=FV/(1+r)n=2/(1.05)10.
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.
=2,000,000*0.61391=\$1,227,820.00 need to be set aside at the end of each year for the next ten years.
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.
According to smallbusinesschron.com, time value is the time value of money is the idea that a particular sum of money in your hand today is worth more than the same sum at some future date. The firm does not know if how much revenue they will generate each year to pay of this expected liability. When the cost of living increases, many people do not spend money but rather save the funds they have. A firm can always forecast what they may receive as revenue but sometimes they can be off point and cause the firm to close. If the firm has this amount saved to cover the cost, they will be in a great financial position if they need to extend their time for payment in the future.
Analyze factors other than the time value of money that management considered or should have considered in reaching the business decision.
When a business chooses to invest money in a project such as purchasing of a new piece of equipment it may be years before that project begins producing a positive cash flow. The business needs to know whether those future cash flows are worth the upfront investment. That’s why the time value of money is so important to capital budgeting. Capital budgeting is decisions relate to decisions on whether a client should invest in a long-term project, capital facilities and/or capital equipment/machinery. (James Wilkinson, 2013) Capital budgeting involves the calculation of each project’s future accounting profit by period, the cash flow by period, the present value of the cash flows after seeing the time value of the number of years it takes for a project’s cash flow to pay back the initial cash investment, and assessment of risk.
REFERENCES
Merritt, Cam. (2018). Why Is the Time Value of Money So Important in Capital Budgeting Decisions? Retrieved from https://www.smallchronbusiness.com
Wilkinson, James (July 23, 2013). Capital Budget Methods. Retrieved from https://www.strategiccfo.com
NEED FOLLOW-UP RESPONSE (2-3 PARAGRAPHS WITH 1 REFERENCE):