[Solved] Calculate the amount the firm would need on the present date as savings to cover the expected liability.

Assignment 1: Discussion—Value of Money

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.

Tasks:

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.

STUDENT RESPONSE:

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. Then, 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 (Argosy University Classroom, 2018).

After using a Present Value (PV) calculator, I can see that the firm would need $1,227,836.51 of savings as of right now to cover the liability they are expecting. The formula for PV takes into consideration Future Value (FV) and is PV= FV after (t) periods / (1+r))t (Argosy University Classroom, 2018). When I calculate using this formula for the current example it looks like this: PV=2,000,000/(1+0.05)10  = $1,227,836.51.

In order to find out how much the firm would need to set aside at the end of each year for the next 10 years to cover the expected liability, the formula would change slightly. To calculate, the formula, PMT = FV/[(1+0.05)10-1)/0.05] = 2,000,000/12.57789  is used. The formula shows that $159,009 would be necessary to set aside each year.

Identify an article that demonstrates the application of time value of money principles to a business decision. Then, 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. Lastly, analyze factors other than the time value of money that management considered or should have considered in reaching the business decision (Argosy University Classroom, 2018).

For this assignment, I choose an article published in the Family Practice Management Journal, written by Deanna Willis MD MBA. The article discusses the different financial and non-financial areas that physicians must consider when deciding whether or not to purchase new equipment such as a flexible Sigmoidoscope. Willis suggests that the time value of money is important and for a complete financial evaluation recommends a break-even analysis, a payback analysis and a net-present-value analysis (Willis, D. R. (2004, March 01)).  All three types of analysis are important because they will take into consideration both short and long term effects of the potential investment as well as how long the investment will take to pay itself off (Willis, D. R. (2004, March 01)).

Before conducting any analysis, data would need to be collected. In order to get an idea of the revenue the flexible Sigmoidoscope will bring in, physicians need to look at the number of procedures being conducted with the new equipment, how many procedures per patient, lost revenue, capital, fixed and variable costs, and the rate of return. The article highlights the use of an excel spreadsheet used to put all the data gathered in one document. The spreadsheet helps calculates the net profit or loss/cumulative incremental cash flow, break-even analysis, payback analysis, and net-present-value analysis (Willis, D. R. (2004, March 01)).

After all calculations, it is discovered that the purchase of the flexible Sigmoidoscope would not be the best decision from a financial standpoint. The article reveals that the payback period in the example is 4.27 years, which is not significantly less than the equipment’s maximum economic life of three to five years. In addition to this, the net present value is $-360.61 (Willis, D. R. (2004, March 01)). When it comes to purchasing new medical equipment, the time value of money is important to take into consideration, but some non-financial factors should also be taken into consideration. Physicians should look to see if the investment in the equipment fits with their overall business strategy, and goals.  Also, it is important to look at all pros and cons of the purchase from a customer satisfaction standpoint as well. For example, will patients truly benefit from the new equipment or is it just a prettier, more expensive way to conduct a procedure that is already being conducted just fine. Maybe patients would prefer to have that money invested in a nicer waiting and/or patient room.

Argosy University Classroom. (2018). Assignment 1: Discussion—Value of Money. Retrieved from Argosy University Classroom: https://myclasses.argosy.edu/d2l/le/content/19071/viewContent/817139/View

Argosy University Classroom. (2018). Module 3: Module 3 – Present Value. Retrieved from Argosy University Classroom: https://myclasses.argosy.edu/d2l/le/content/19071/viewContent/817127/View

Willis, D. R. (2004, March 01). How to Decide Whether to Buy New Medical Equipment. Retrieved March 17, 2018, from http://www.aafp.org/fpm/2004/0300/p53.html

NEED FOLLOW-UP RESPONSE (2-3 PARAGRAPHS WITH 1 REFERENCE):

 

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