Introduction assigning appropriate values to cash flows
Time is an important factor to consider
when making financial decisions. Overtime
the value of money can diminish as well as increase if handled
effectively. The future value of $500 at
an 8 percent rate for 1 year, 5 years will be calculated and discussed. Then the present value of $500 received in 1
year and 5 years at an opportunity cost of 8 percent rate will also be
calculated and discussed. Finally, the
present and future values and its effects in relation to the balance sheet and
budget of the organization will be analyzed.
and present value calculations
The future value (FV) is considered the
value of a current asset at a specified date in the future based on a n assumed
rate of growth over time (Future Value – FV, 2018). The beginning amount
(current worth) of an investment of a lump sum, an annuity, or a series of
unequal cash flows (Gapenski, 2016, p. 307). According to Gapenski (2018), these two values
fall under the time value analysis, which is “the process of assigning
appropriate values to cash flows that occur at different points in the time”
(p. 305). In addition to present and
future value and its importance to any business, opportunity cost is “cost associated
with alternative uses of the same funds” (Gapenski, 2016, p 317).
The future value of $500 at an 8%
interest for 1 year was calculated using the following equation; Future Value =
Present value x Future interest. =
future value of $500 at an 8% interest rate in 5 years equals, 500 734.67.
To find the present value of $500 at an
opportunity cost rate of 8% in 1 and 5 year can be calculated using the
following equation; Present Value = Future value x Present value interest. = FV x .
The PV for year one was calculated =
500 . =
of PV and FV on the Balance Sheet
According to Carther (2018), “calculating
the future value can be complicated to depending on the asset”. This calculation assumes a stable growth rate and
is easily computed when there is a guaranteed interest rate involved such as in
savings account, however when stock and securities are involved the FV becomes
more difficult to determine. Other factors
that affect future value investments include inflation, however stocks help to “guard
against inflation” (Hartman, 2018). On
the balance sheet, present value can be considered a liability, for example, lease
payments on a leasing financial statement (Gapenski, 2016, p. 132). With opportunity cost, there are alternatives
involved which can cause risks, as when money is used for one project that
money cannot be used for another, opening the opportunity for other
alternatives, this would be applied to the investment cash flows. Although there are some implications to
consider with both values, however the importance of both help to foresee long-term
risk and value of money for the future. Overall,
“the value of the money you have now is not the same as it will be in the
future and vice versa” (Carther,
(2018). Understanding the Time Value of Money. Investopedia.
Retrieved from, https://www.investopedia.com/articles/03/082703.asp
Future Value – FV. (2018). Investopedia.
Retrieved from https://www.investopedia.com/terms/f/futurevalue.asp
Gapenski, L. C. (2016). Healthcare
Finance: An Introduction to Accounting and Financial Management, 6th Edition.
South University. Retrieved from https://digitalbookshelf.southuniversity.edu/#/books/9781567937428/
Hartman, D. (2018). What Are the
Positive & Negative Effects of a Future Value Investment?. Pocket
Sense. Retrieved from,
Present Value – PV. (2018). Investopedia.
Retrieved from, https://www.investopedia.com/terms/p/presentvalue.asp#ixzz54Uu8KG3