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Assignment 1: Discussion Question
Financial mangers make decisions today that will affect the firm in the future. The dollars used for investment expenditures made today are different from the cash flows to be realized in the future. What are these differences? What are some of the techniques that can be used to adjust for these differences?
By the due date assigned, respond to the discussion question. Submit your response to the Discussion Area. Start reviewing and responding to your classmates as early in the module as possible.
Grading Criteria
Maximum Points
Quality of initial posting, including fulfillment of assignment instructions 16
Quality of responses to classmates 12
Frequency of responses to classmates 4
Reference to supporting readings and other materials 4
Language and grammar 4
Total: 40
Student 1
m3 a1 disc
Lalita Ndiforchu posted Jan 19, 2018 7:44 PM
Financial mangers make decisions today that will affect the firm in the future. The dollars used for investment expenditures made today are different from the cash flows to be realized in the future. What are these differences? What are some of the techniques that can be used to adjust for these differences?
The dollars used for investment expenditures made today do not have an equal value to the cash flows to be realized in the future. The reason for this has to do with the time value of money, which determines most financial decisions. The concept of the time value of money includes both the present value (PV) of the money and the future value (FV) of the funds. “Calculating the time value of money enables you to find the current price of future cash flows and vice versa.” “Future Value (FV) refers to the amount of cash to be received or paid at a future date.” “Present Value refers to the current value of money —either paid or received — in the future. It is what investors will pay today for future cash flows
For equal amounts of money this decision of when to take the money — today or in the future —is an easy one: sooner is always better than later.
Student 2
M3A1 Discussion
Tiffany Hughes posted Jan 20, 2018 12:05 PM
The decisions made by financial managers today affect the firm in the future. The capital used for investment expenditures today differs from the cash flows to be realized in the future. The differences here comes with the present and the future value. The decision as to when to take money (present or future) is more comfortable for equal amounts of cash and the present time is always preferred (Johnson & Melicher, 2013).
The present value means the current work done by a future sum of money or stream of cash flows with a specified return rate. Recall that the future cash flows are discounted at the discount rate. Also note that for higher discount rates, the present values of future cash flows are always lower. Valuation of future cash flows requires a proper determination of the discount rate of whether they constitute obligations or earnings. A series of equal payments occurring at equal intervals is referred to as an annuity, e.g., rental payments, leases, etc. For an ordinary annuity, these payments happen at the end of a specific period whereas, for an annuity due, they occur at the beginning of each period. A constant and an infinite stream of similar cash flows is referred to as the present value of perpetuity (BRIGHAM, 2018).
The future value constitutes the value of the assets or the cash at specific future dates that is similar in the value to a particular sum of money currently. The future value of a stream of an annuity with an assumption that payments are invested at specific interest rates is what we referred to as the future value of an annuity (BRIGHAM, 2018).
Techniques to adjust the differences
Recall that, better receive cast currently than later and always prefer receiving more than less cash. This is the fact that where the opportunity cost is high, the relative value of a future cash flow tends to be low (Johnson & Melicher, 2013).
The techniques include:
· Cash flow diagrams – These are pictures of financial problems that displays all the cash inflows as well as outflows within a specific period. Use it to visualize a problem and to determine whether the problem is solvable through TVM methods (BRIGHAM, 2018).
· Interests on investments – Since compound interest is used in TVM problems, determine the appropriate interest method to use (Simple or compound) on your investment expenditures.
· Loan amortization – This method is used to pay for loans in equal installments. Apply it to reduce your principal amounts as part of every payment gradually serves the interest whereas the other part progressively decreases the principal figure.
· Payments as well as the number of periods. – The periods are an evenly-spaced time interval for which the payments are made within an annuity period. The payments constitute a series of evenly-spaced and same cash flows.
References
BRIGHAM, E. F. (2018). FUNDAMENTALS OF FINANCIAL MANAGEMENT. S.I: SOUTH-WESTERN.
Johnson, R. W., & Melicher, R. W. (2013). Financial management. Boston: Allyn and Bacon.
