Pakistan Firms' Capital Budgeting Trends (Coursework Sample)

Assessment Description 1
Using the GCU Library, locate a journal article about capital budgeting. In the subject line of your post, include the name of the article that you read. Then, in your initial post, provide a link to the article and a summary followed by your reaction to the article. The summary should be approximately 250 words and the reaction should be approximately 150 words. The summary should describe the major points of the article, and the reaction should demonstrate your interpretation of the article and how you can apply that knowledge. Do not choose an article that one of your classmates has already posted. To participate in a follow-up discussion, choose one of the articles that a classmate has posted and provide your own reaction to it. Note: It will be challenging to find a relevant article if you do not use the library.
Please include proper citations in your discussion post. Points will be deducted if proper citations are not used.
ARTICLE LINK
https://eds-s-ebscohost-com.lopes.idm.oclc.org/eds/detail/detail?vid=22&sid=bae241b6-c77a-4821-a611-8622f29733ba%40redis&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=139688836&db=bth
Assessment Description 2
Review Case 9.32 in your textbook. Using the questions provided as a guide, explain what you would do if you were Amy in this situation.
Participate in follow-up discussion by debating whether Amy should report Tony as indicated in part D of the case. Ask questions and post comments regarding classmates' posts, or respond to follow-up questions posted by the instructor.
Please include proper citations in your discussion post. Points will be deducted if proper citations are not used.
CASE Unit 9.2 Time Value of Money
Guided Unit Preparation
Answering the following questions while you read this unit will guide your understanding of the key concepts found in the unit. The questions are linked to the learning objectives presented at the beginning of the chapter.
LO 2
What is present value?
What three factors does present value depend on?
What is an annuity?
Long-term investment decisions, including capital budgeting decisions, involve outflows of cash in some periods and inflows of cash in others. How do managers decide whether the inflows justify the outflows? Answering this question isn’t as straightforward as adding up the inflows and subtracting the outflows because of the time value of money—one dollar today is worth more than one dollar in the future. Why? Because a dollar today can be invested to earn interest, which will make it worth more than a dollar in the future. We need to compare the cash flows not just in terms of their amounts, but in terms of when they occur. One way to do so is to determine the present value—that is, the value today—of the dollars to be paid or received in the future.
Present Value of $1
Assume you have just been offered a business opportunity that will pay you either $20,000 today or $20,000 in one year. Your investment, whether of time or money, will be the same with either option; you just need to decide which return is better for you. Which one would you choose? If you are like most people, you would choose to receive $20,000 today. But what if the offer were for $20,000 today or $21,000 in one year? The choice between those two options may not be quite as obvious.
Let’s look at the first scenario, which illustrates the concept of present value. Why would you choose $20,000 today over $20,000 a year from now? An obvious reason is that you could take the $20,000 you receive today and invest it to earn more money. At a minimum, you could deposit the money in an interest-bearing bank account; if you left it in the account for the entire year, you would have more than $20,000 at the end of the year. In a money market savings account that pays 2% simple interest, for example, you would have $20,400 ($20,000 + [0.02 × $20,000]) at the end of the year. If you could find an investment option that offers a higher rate of return, you would have even more than $20,400. Thus, a dollar received today is worth more than a dollar received at any time in the future because today’s investment is expected to earn additional money.
What about the choice between $20,000 today and $21,000 a year from now? To make an appropriate comparison, you need to evaluate how much money each option is worth at the same point in time. Let’s assume that you choose the $20,000 and invest it today. The following table summarizes how much money you would have at the end of the year if you invested the $20,000 at an 2%, 5%, or 10% rate of return. If you can only earn an 2% return (or lower), you should take the $21,000 in one year, since $21,000 is greater than the $20,400 you would have after earning 2% interest (all other things held equal). At a 5% rate of return, you would have $21,000 at the end of the year, so you would be indifferent between $20,000 now or $21,000 in one year. When the rate of return is higher than 5%, you will have more than $21,000 at the end of the year; therefore, you should choose to receive the $20,000 today.
Decision: $20,000 Today or $21,000 One Year from Today
Rate of Return Interest Earned on $20,000 Investment Value at the End of One Year ($20,000 + Interest) Preferred Option5
2% $20,000 × 2% = $400 $20,400 $22,000 at year end
5% $20,000 × 5% = $1,000 $21,000 indifferent
10% $20,000 × 10% = $2,000 $22,000 $20,000 now
This scenario compares future values; that is, at 2% per year, $20,000 today is worth $20,400 at the end of one year. To evaluate these same options, we can compare present values. Present value comparisons are more helpful when a company is evaluating an investment that will generate multiple inflows and outflows over several periods.