SCIENCE Discussion(NO PLAGIARISM, A++ WORK, QUALITY, ON TIME)

Assignment no more than 300 words

When a sports organization makes an investment, it expects that the money invested today will earn more in the future. The gain or loss of an investment over a period of time is the rate of return. Next we will look at the time value of money. If someone were to travel back in time to 1955, he or she would experience instant sticker shock. Prices for nearly all items would be lower – just ask someone 30 years older than you about what it used to cost to buy things. A dollar could purchase more goods or services in the 1960s than in the 2020s. This loss of purchasing power, or real value, is the result of inflation. Prices tend to increase over time, and the value of money tends to decrease, even though the nominal value, or face value, of money remains the same.

The inflation rate affects all financial decisions, particularly those related to long-term investments. Hence, financial managers are wise to understand and monitor the inflation rate. Organizations that invest their money for future purchases must ensure that they are receiving interest that at least matches the rate of inflation, or the real value of their investment will decrease.

Forecasting is a prediction and quantification of future events for the purpose of budgeting. The difference between a forecast and a plan is that a forecast is simply a prediction, whereas a plan defines actions to be taken.

Your investment company has been approached about investing in a local minor league soccer team. The team owners are in need of additional funding to renovate their current facility and make it more fan friendly. You have been provided a five year profit/loss projection. Explain how the time value of money would impact your decision. How does the time value of money relate to the profit/loss forecast?

Respond to both no more than 125 words

1. Tim

The time value of money is a concept that cash in your pocket now is worth more than cash in your pocket in the future (Kokemuller, 2019). However, this is not always the case. When looking at the value of the initial offer and the value of that offer plus interest over say a 5-year period the choice to wait could be a benefit. On the flip side depending on what that money is going to could make taking the initial value instead of the future value. Inflation plays a major role in this choice meaning is the value of the product to be purchased going to increase over time or remain the same. This could mean the immediate purchase will save money overall versus waiting. Below is an example to explain:

“For example, given the choice between receiving $1 today or $1 a year from now, you should take the money today. You could invest that $1, and even if you only earned a 2 percent annual return on your investment, you still would have $1.02 a year from now -- more than the $1 you'd have gotten if you waited. If you didn't invest that $1 at all but simply spent it, you'd still be better off; because of inflation, the $1 usually will have more buying power today than in the future” (Merrit, 2020).

Looking at the scenario given as the investment company time value of money would impact my decision by laying out the end results of my investment. Allowing me to see if the investment will generate positive revenue for me at the end of the 5-year period. Additionally, I would use the Net Present Value (NPV). This is the positive and negative cash flow over the entirety of the investment. “NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, capital project, new venture, cost reduction program, and anything that involves cash flow (CDI, n.d.). Without being provided a profit/loss statement it would be a tough decision to invest, but with it, you can use Time Value of Money and NPV to get a general idea of your loss or gain and then make a solid decision based on those numbers.

2. Sara

Boundless via www.saylor.org states that "The Time Value of Money is the concept that money is worth more today than it is in the future." If I were approached by minor league soccer owners to invest in their facility renovations, only being given their 5 year projection for P&L, I would be skeptical. Since the P&L statement focuses more on revenue than on cash, it would be hard to determine a future value of the money I would be investing. If the team renovated their facility to add more capacity for fans, then their revenue would (should) increase. However, Joe Knight in his www.hbr.org article "The Most Common Mistake People Make in Calculating ROI" reminds analysts that in addition to revenue, you need to look at other details in the Balance Sheet (such as additional inventory, A/R, etc) that affect actual cash on hand that could eat away at revenue. Mr. Knight reminds us that cash is not the same as profit. Cash has a present and future value while profit does not. This is why analyzing cash flow statements are more important than analyzing revenues. The Khan Academy video clearly showed that $100 today has more value 1 and 2 years from now, especially with compounded interest. If we take that same approach for evaluating if we should invest in the soccer team, we should evaluate the additional costs associated with the additional revenue to generate actual cash flows to see if they meet our "hurdle rate", or minimum rate of return as mentioned by Mr. Knight.

Conversely, if we have a future value of the money we have invested in the soccer team in mind, we can use the formula provided by www.StrategicCFO.com for the Future Value of Money, which is the Present Value of Money x (1 + Discount Rate). The discount rate needs to be determined when deciding to invest in the soccer team. If the discount rate is negative, then deny investment.

While there are 4 main ways to decide if pursuing investment in the soccer team is worthwhile, according to www.bizfilings.com article "Financial Analysis of Major Projects", only Net Present Value and Internal Rate of Return take into consideration the Time Value of Money. They actively use cash flows to decide if investment is worthwhile, unlike the other 2 methods, Payback Period Analysis and Accounting Rate of Return, which focus on revenue.

In conclusion, without the soccer team providing their balance sheet and/or cash flow statements, I would be wary of investing in team. Revenues do not tell the whole picture of current cash, which is needed to determine if the future value of the present money invested has a positive or negative discount rate - a profit or a loss.