Week Four Discussion (2)

docx

School

University of the Cumberlands *

*We aren’t endorsed by this school

Course

531

Subject

Finance

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by BaronWaterTurtle240

Week Four Discussion Dylan Sharpe University of the Cumberland’s BDAM-534-M20: Managerial Finance Dr. Mitchell Miller 02/04/2024

C hapter 4 Regarding financial investments and planning, it is essential to understand the concepts of Future Value (FV) and Present Value (PV). FV refers to the value an investment or cash flow will have at a specific point based on a specific interest rate. On the other hand, PV is the current value of a future sum of money, discounted back to the present at a specific rate of return or interest rate. Annuities refer to identical payments made regularly over a specific period. These payments can be either ordinary annuities made at the end of each period or annuities due, where payments are made at the start. On the other hand, perpetuities are annuities that go on indefinitely without any end date. Although perpetuities are rare in practice, they are helpful for theoretical analysis. To calculate the future value of an ordinary annuity, compound interest is applied to each payment as it accumulates over time. The formula used to determine the future value of an ordinary annuity is: FV = Pmt * ((1+r)^n-1/r) Where FV= Future value Pmt= Payment per period R= interest rate per period N= Number of peroids

There are two types of annuities: ordinary annuity and annuity due. The main difference between the two is that payments are made at the beginning of each period in an annuity due. In contrast, in an ordinary annuity, payments are made at the end of each period. To find the future value of an annuity due, you can use the same formula as an ordinary annuity, but you need to add one extra period of interest. To determine the current worth of all the future cash flows, we calculate the present value of an ordinary annuity. Similarly, for an annuity due, we follow the same process but make adjustments based on the timing of payments. To determine annuity payments, periods, or interest rates, different formulas are available to help you calculate them based on the information you provide. These formulas require rearranging the present value or future value formulas to solve for the unknown variable. Calculating the future and present value of an uneven cash flow stream involves dealing with irregular or non-uniform cash flows over time. To determine these values, each cash flow is discounted to the present or compounded forward to the future. When you take out a loan, you must pay it back over time with regular payments, including the principal amount and the interest. This process is known as loan amortization, and it involves making payments that cover the interest on the remaining balance while gradually

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

reducing the principal. Amortization schedules provide a detailed breakdown of each payment, showing how much is allocated toward interest and how much goes toward the principal. Discussion In corporate finance, it is crucial to understand the concept of the time value of money (TVM). This concept is based on the idea that a dollar today is worth more than a future dollar due to the potential for investment returns. Knowing about TVM is important for making sound financial decisions in a corporate setting, including investment analysis, capital budgeting, and financing strategies. When corporations consider investing in a project, they use Time Value of Money (TVM) principles to evaluate the investment opportunity and make informed decisions about allocating resources. To assess a potential project, managers must consider the cash flows generated by the project over its lifecycle and discount these cash flows back to their present value using an appropriate discount rate. One common technique that applies TVM principles is Net Present Value (NPV) analysis. NPV calculates the present value of a project's future cash flows and compares it to the initial investment. A positive NPV suggests that the project is likely to generate value and exceed the required rate of return. At the same time, a negative NPV indicates that the project may not be economically viable. This helps managers make better decisions about where to allocate their resources.

When companies must invest in long-term projects such as constructing facilities or buying equipment, they must raise the required capital. In this regard, they evaluate various financing options based on the cost of capital and the time value of money. TVM considerations influence the decisions regarding capital project financing. For instance, businesses may choose between equity and debt financing options after considering factors such as interest rates, dividend payments, and the cost of capital. Debt financing involves borrowing funds at a specific interest rate, while equity financing involves issuing company ownership shares. Optimizing the capital structure is crucial to minimizing the overall cost of capital and maximizing shareholder value. TVM considerations play a vital role in determining the optimal mix of debt and equity financing. Different companies have different objectives, risk tolerance levels, and financial priorities when managing corporate funds. The decisions regarding the allocation and management of corporate funds are often influenced by the time value of money (TVM), which helps optimize returns and minimize risk. One aspect of corporate fund management is treasury management, which involves managing funds efficiently, maintaining liquidity, and maximizing returns on cash reserves. TVM principles are helpful for treasury managers when evaluating investment opportunities, selecting appropriate financial instruments, and managing cash flows effectively. Another critical aspect is working capital management, which focuses on managing short-term assets and liabilities to ensure smooth operations and maximize profitability. TVM

considerations are crucial in making decisions about inventory management, accounts receivable, and accounts payable to optimize cash flows and profitability over time. To assist sound financial decisions, evaluate investment opportunities, and manage funds effectively, corporations must apply TVM principles. By comprehending the time value of money, corporations can better their financial performance, enhance shareholder value, and achieve long- term success.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

References Crafting a Distinctive Finance Strategy to Propel Your Business to Success - Wine Exchange. https://wineexchangetampa-hub.com/crafting-a-distinctive-finance-strategy-to-propel-your- business-to-success.html Ehrhardt, M. C., & Brigham, E. F. (2023). Corporate Finance: A Focused Approach (8th ed.). Cengage Learning US. https://reader2.yuzu.com/books/9780357714713 Future Value of Growing Annuity Calculators – Ordinary Growing Annuity and Growing Annuity Due - Michael's Law Firm, Experienced GTA Trial Lawyers. https://www.michaelsfirm.ca/future-value-of-growing-annuity-calculators-ordinary-growing- annuity-and-growing-annuity-due/ How to calculate loan payments - feed Opi. https://feedopi.com/how-to-calculate-loan-payments/ How to Calculate NPV on BA II Plus Calculator. https://flhespectator.com/how-to-compute-npv- on-ba-ii-plus/ Private Equity | csinvesting. https://csinvesting.org/tag/private-equity/