## Introduction assigning appropriate values to cash flows

Introduction

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.

Future

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. =

500 The

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 . =

500

Effects

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,

References

Carther, S.

(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,

https://pocketsense.com/positive-negative-effects-future-value-investment-4896.html

Present Value – PV. (2018). Investopedia.

Retrieved from, https://www.investopedia.com/terms/p/presentvalue.asp#ixzz54Uu8KG3