NEED FOLLOW-UP RESPONSE (IT ONLY NEEDS TO BE 2-3 PARAGRAPHS WITH 1 REFERENCE)

ORIGINAL QUESTION:

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.

MY RESPONSE:

**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.**

**Future Value**

**Period**

**5%**

**Total**

10

**Multiply**

1.629

**Equals**

$325,800,000.00

Therefore, the amount of $325,800,000.00 is what is needed 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.**

**Present Value**

**Period**

**5%**

**Total**

10

**Multiply**

0.6140

**Equals**

$122,800,000.00

Therefore, $122,800,000.00 would have to be set aside at the end of each year for the next ten years to cover the expected liability.

**Part 2:**

**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.**

Time value of money (TVM) refers to the idea that the same amount of money is worth different amounts at different time periods. Why? First, money tends to have differing degrees of purchasing power at different times, (Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers, 2017).

**Example 1:**

Imagine in 1940 you had $1. Because the cost of living was extremely lower in 1940 as compared to today, you could have purchased a ticket to the latest movie in the theater (24¢), a loaf of bread (10¢), a gallon of gas (11¢), and still would not have spent half of your money (Box Office Mojo, n.d.; People History, n.d.). Today, $1 doesn’t get you a pack of gum. This erosion of purchasing power is known as inflation and is a natural outcome within relatively free market economic systems (Brayley & McClean, 2008). (Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers, 2017).

Second, money loses its value because of opportunity cost.

**Example 2:**

If a woman sticks $10,000 under her mattress for five years, at the end of five years she will still have $10,000. But, if she were put that money into a savings account that pays a 2% return, she would have $11,041. Thus, her decision to put the money under her mattress carries an opportunity cost of $1,041, (Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers, 2017).

The manager for a major baseball athlete, chose to use the TVM Decision Tree method. On one side are the PV formulas and the other side has the FV formulas. If the manager is discounting payments, the PV side would be used; if manager is compounding payments, the page would be flipped to show the FV side; however, before evaluating any offers from a major team, the manager must first master the TVM Decision Tree by working through a few practice problems, such as asking pertinent questions, while taking in to account, delayed annuity for PV, growing annuity for FV, and deferred compensation to know exactly what formula to use to calculate the PV and FV, (Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers, 2017).

**Analyze factors other than the time value of money that management considered or should have considered in reaching the business decision.**

In the baseball world, there are many reasons why a team would want to structure deals using deferred money. One such reason might be that the owner has other ways to earn a return on his/her money. In the case of the Mets and Bonilla, the Mets owners (the Wilpon family) were receiving 12–15% returns through their investments with Bernie Madoff (Rovell, 2016), so investing the $5.9m with Madoff would cover the future Bonilla payments while still providing a multimillion dollar return for the Wilpons. Of course, in hindsight this approach failed since Madoff’s returns were the result of a Ponzi scheme, but at the time it seemed like a smart financial decision. More often, the owner has other [legitimate] businesses where the owner feels he/she could earn a better return on the money.

**Example:**

If the discount rate is 4% and the owner can invest potential salary money in a different venture that will get a 7% return, the owner may want to defer payments to the player and net 3% from the investment in the alternative venture, (Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers, 2017).

Reference

*Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers*. (2017). Retrieved from Case Studies Sport Management: http://eds.a.ebscohost.com.libproxy.edmc.edu/eds/pdfviewer/pdfviewer?vid=0&sid=89cfbf20-9fce-41a1-a3da-68ff707b819c%40sessionmgr4007

INSTRUCTOR RESPONSE:

Does putting $325M in the bank today to be sure you can make a payment of $2M in 10 years seem reasonable to you? Would you recommend this for a company?

NEED FOLLOW-UP RESPONSE TO THE INSTRUCTOR (2-3 PARAGRAPHS & 1 REFERENCE):

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.