Week 4 Discussion 1 & 2 Classmate Response
kingstonman41
Week4Discussion1ClassmateResponse.docxWeek 4 - Discussion Forum 1
There are two of my classmate’s discussion that is on the this document. I need to respond to each one. Giancarlo Marchena and Lisa James
Giancarlo Marchena
The relationship between time and money begins with the understanding the value of a single unit of time. The clearest ratio that highlights this relationship would be productivity over any unit of time. For example, if a manufacturing plant produces a certain number of units in one hour it can be estimated that the value of an hour for that plant is worth the sale price of number of units that they could have reasonably produced in that hour. A less easily measured relationship between time and money is the productivity not associated with production but namely the functions associated with business development, capturing sales and marketing. This time is less quantifiable as it may vary for parts of the year, month and day. These tasks are not linear converted into sales or cost therefore they cannot be measured under a succinct time interval. The easiest way to estimate this would be in terms of cost and would be associated with paying the employees whose productivity generally contributes to these functions. Furthermore, the time associated with the production of those employees per any given unit of time can be estimated to equal to their compensation.
Managers take into consideration the relationship between time and money when considering spending capital. The first step in considering spending capital is to understand the value of the capital expenditure being considered. According the Block, Hirt and Danielson (2019), future value is defined as the value of any capital that can grow at a interest rate for any given amount of time. It is important to understand future value because capital spent today cannot be spent tomorrow therefore the potential growth of that capital should be weighed against the benefits spending that capital. Typically, capital expenditures can be viewed in two distinct matters when considering their financial viability. The first category of capital expenditure is the purchasing of an asset that allows for new production. For example, a new machine that allows for a new line of production would fall under this category. When considering this type of asset, typically the production value and use of asset indicates the time by which the capital expenditure will be paid off. More specifically, if the machine mentioned above produces a certain number of units a day at a projected sale price, the number of days for which that asset needs to be in production to pay for itself can be estimated. The next category would be an expenditure which improves productivity or saves time. An example of this type of expenditure would be a system that allows production to speed up. This asset is measured by how much time is saves and is quantified by multiplying that time versus the salary or wages of the employees affected. Furthermore, this type of asset is paid off when the cost of time savings equals the cost of the asset.
The decision to make a capital expenditure is typically correlated to the date for which the asset can pay for itself via the production of sale units or the cost savings associated with time. More financially stable business can afford to buy assets whose pay off date is farther in the future because there is less risk of business failing. Less stable or newer business may want to buy assets with closer pay off dates to the present due to higher risk of business failure.
References
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management. New York: Irwin. (17th ed.). Retrieved from https://www.vitalsource.com/
Lisa James
Summarize the concept of time value as it relates to money.
The time value of money is an important concept in complex financial decisions that incorporates the impact of the timing of cash flows in those decisions (Time Value of Money, n.d.). Money can have a future value, which is the amount that grows with interest over time (Block, Hirt, & Danielson, 2020). When more interest is earned on the interest from the year before this is considered compounding. However, money can also have a present value that is the exact opposite of the future value. The future value of money is typically worth more than the present value because of the accrued interest. Understanding the concept of the time value of money helps to see how the money would be paid today versus in the future.
Explain how managers estimate the future benefits of capital.
Money managers are responsible for best determining to allocate or budget capital in order to make determinations as to how the money will best be utilized in order to ensure future growth. In order to make this estimation, they will look at the potential growth of the funds. If the market is projected to go stagnant over time, it might be advantageous to utilize the capital now towards other resources. However, a money manager might recommend budgeting the capital if the money will accrue interest over time or if the money will be worth more over time. In order to make the appropriate estimate, they will consider the future value of the capital as a lump sum, meaning there will be no additional deposits or withdrawals, or as the future value of an annuity, which can be equal value deposits or withdrawals over time.
Analyze how the time value of money impacts capital investment decisions.
One thing that money managers take into consideration when making capital investment decisions is opportunity cost. Opportunity cost is related to the time value of money because it is the loss that results from a missed financial occasion (Petryni, n.d.). If the money is spent now instead of investing it, it can spend it at the current value that it is. However, they could be missing out of increasing the money due to interest gains if they do not invest it. Additionally, they also must determine if the market is projected to take any sort of decline in the next few months and that the value of the money could lessen over time.
Resources
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/
Petryni, M. (n.d.). Why Is the Time Value of Money Important in Capital Budgeting Decisions? Retrieved April 28, 2020, from https://www.sapling.com/8650708/time-important-capital-budgeting-decisions
Time Value of Money. (n.d.). Retrieved April 27, 2020, from https://accounting-simplified.com/management/investment-appraisal/time-value-of-money.html
