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.
McGrath, R. G., & MacMillan, I. C. (2009). How to rethink your business during uncertainty. MIT Sloan Management Review, 50(3), 25-30.
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.