Discussion

The CEO of  Pride Company asked you to explain to him if it is really true that the discount rate is inversely related to the present value of the future cash flow. Explain your answer and provide some examples that the CEO can understand (300 words).

and two replies each 200 words

Reply1:

Understanding the relationship between the discount rate and the present value of future cash flow is essential so that organizations are able to function smoothly. The net present cash flow expresses a series of values of cash flow in dollars. The net present value stems from the time value of money (Fortaleza et al., 2020). Organizations and individuals are required to give up some money now so that they are able to enjoy more money in the later period.  It is with the help of the net present value that organizations are able to determine and estimate the future cash flow. The discount rate is a rate that is applied for the reduction of the future cash flow. the discount rate is seen by many organizations as an opportunity to invest their money in a particular project or a work (Penman, & Yehuda 2019). It can be said that there is an inverse relationship between present value and interest rate and time period. This means that the higher the interest rate or the discount rate the lower is the present value. This goes the same for time value as well. The higher the time value the lower is the present value.

 It is important for organizations to be able to understand the relationship between cash flow and discount rate so that they are available to act wisely and efficiently. Since discount rate and cash flow share an inversely proportional relationship it is important for organizations to make use of both wisely. However, it is to be noted that the inverse relationship of net present value and discount rate is not always true. It's different from situation to situation. the main reason behind the inversely proportional relationship between net present value and the discount rate is that the excellence of outflow is mostly before the inflow. When an organization faces a higher discount rate, there is an emphasis on earlier cash flows which causes this relationship (Khimichi 2017).

Reference

Fortaleza, E. L. F., Neto, E. P. B., & Miranda, M. E. R. (2020). Production optimization using a modified net present value. Computational Geosciences, 24(3), 1087-1100.

Khimich, N. (2017). A comparison of alternative cash flow and discount rate news proxies. Journal of Empirical Finance, 41, 31-52.

Penman, S. H., & Yehuda, N. (2019). A matter of principle: Accounting reports convey both cash-flow news and discount-rate news. Management Science, 65(12), 5584-5602.

Reply2:

The CEO of Pride Company asked you to explain to him if it is really true that the discount rate is inversely related to the present value of the future cash flow. Explain your answer and provide some examples that the CEO can understand

Every decision made in a business has financial implications, and any decision that involves the utilization of cash is a corporate financial decision. Defined broadly, everything that a business does fits under the rubric of corporate finance. It is, in fact, unfortunate that we even call the subject corporate finance, because it proposes to many spectators an attention on how large corporations make financial decisions and appears to reject small and private businesses from its domain. A more appropriate title for this book would be Business Finance, because the basic principles remain the same, whether one glances at large, traded on an open market firms or small, privately run businesses (Foster & Kaplan, 2001). All businesses have to invest their assets wisely, find the correct kind and blend of financing to finance these investments, and return cash to the proprietors if there are insufficient wise investment.

When making investment, financing and profit decisions, corporate finance is single-minded about the ultimate objective, which is assumed to be maximizing the value of the business to its proprietors. These first principles give the basis from which we will extract the various models and theories that comprise current corporate finance, yet they are also good judgment principles (Foster & Kaplan, 2001).

It is incredible vanity on our part to assume that until corporate finance was created as an intelligible discipline starting only a couple decades ago, individuals who ran businesses made decisions randomly without any principles to administer their thinking. Great businesspeople through the ages have always perceived the importance of these first principles and adhered to them, albeit in intuitive ways. In fact, one of the incongruities of ongoing occasions is that many managers at large and presumably sophisticated firms and their consultants and bankers, with access to the latest corporate finance innovation, have dismissed these basic principles (Madden, 2002).

Given the significance of this objective for both the turn of events and the applicability of corporate financial theory, it is important that we examine it substantially more carefully and address a portion of the genuine concerns and criticisms it has garnered compare firm value maximization to alternative objectives (Madden,, 2002).

References:

Foster, R. and Kaplan, S., Creative Destruction: Why Companies That Are Built to Last Underperform the Market – And How to Successfully Transform Them, Doubleday, 2001.

Madden, T.J. (University of South Carolina), Fehle, F. (University of South Carolina) and Fournier, S.M. (Harvard University), Brands Matter: An Empirical Investigation of Brand-Building Activities and the Creation of Shareholder Value, unpublished paper, 2 May 2002.