M3 – Follow-Up Response to P
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My Original Posting:
Finance and Value of Money
Part 1: Calculations of Value of Money
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 (FV) = PV (1 + r) n
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.
PV(C10) = C10 / (1+r)10
= $2,000000 / (1.05)10
Part 2: Application of Value of Money
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.
Normally, the concept of the time value of money is due to the fact that money is worth more at present as compared to the future value. The potentiality of present money to finance investment decisions make present money more valuable to companies and investors. In other words, as long as money can earn some interest, and money is worth much more the quicker it is received as compared to when such payments are delayed. This is a very important concept to investors and managers especially with regard to investment opportunities that only present money can finance. The concept mainly takes into consideration two main sub-concepts, that is, the present value(PV) and the future value(FV) which dictate the use of any amount of money in question (Williamson, 2010).
The application of the concept of the value of money in decision-making. Most business organizations put a premium on the concept due to the operational management impact of decisions relating to the handling of deferred payments. Future payments limit the capacities of business organizations to take advantage of investment opportunities in the present time. For instance, the management of the Walmart Inc. takes a keen interest in the concept of the value of money. The management normally makes a decision on investment, financing, and creation of wealth for the shareholders. The investment decisions have a direct impact on the cash flows as far as the concept of the value of money is concerned(Williamson, 2010).
The acquisition of assets and the concept of value for money. The management of the Walmart Company uses the concept in the decision-making relating to the acquisition of business assets such as new types of machinery and other most important forms of current assets. The company finds its culture to avoid deferred payments in the effort to maintain liquidity and increases cash flows in an effort to acquisition assets. The deferred payments by the creditors have been behind the financial woes the company faced in the recent past (Williamson, 2010).
Analyze factors other than the time value of money that management considered or should have considered in reaching the business decision.
Other factors that the Walmart management takes into consideration when acquiring assets include the market forecast, financial incentives, the strategy used by the competitors as well as the technological change.
The impact of the factors affecting the decision by the management of the Walmart organization to acquire new assets. With regard to the strategies used by the rival firms within the cereal industry, the management of the company finds it necessary to purchase new assets to keep up with the competition. Secondly, the financial incentives such as deductions in allowances. Similarly, technological change and market forecast have a significant impact on the acquisition of new assets by managers of the Walmart Inc. (Friedman, 2017).
Friedman, M. (2017). Quantity theory of money. The New Palgrave Dictionary of Economics, 1-31.
Williamson, J. P. (2010). Cost innovation: preparing for a ‘value-for-money’revolution. Long Range Planning, 43((2-3)), 343-353.
Sorry Jason, did not mean to post my discussion assignment as a reply to you. Please see below my response to your assignment:
According to Simply Wall Street, they used a 2-stage growth model to calculate the present value for Walmart. The first stage, they considered the two stages of the company’s growth. The focus was on the initial period and the higher growth rate. The second stage was based on assumption of the perpetual stable growth rate. A consensus of the analysts covering the stock was used to determine estimated PV cash flows over the next five years, (Calculating The Intrinsic Value Of Walmart Inc (LON:0R1W), 2018).
What are your thoughts on how the PV was determined using a 2-stage growth model?
Calculating The Intrinsic Value Of Walmart Inc (LON:0R1W). (2018). Retrieved from Simply Wall Street: https://simplywall.st/stocks/gb/consumer-retailing/lse-0r1w/walmart-shares/news/calculating-the-intrinsic-value-of-walmart-inc-lon0r1w/
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