Time Value of Money

Upon completion of this learning module, you should be able to:

• Calculate the time value of money.
• Apply the time value of money to value cash flows.
• Choose among competing projects using the time value of money.
• Incorporate biblical and ethical principles into capital budgeting.

Introduction and Alignment

Most financial decisions have costs and benefits that occur at different points in time. If we treat money received today the same as money received in five years we will not make optimal financial decisions. In general, a dollar received today is worth more than a dollar received in one year. In this module you will learn how to value cash flows at different points in time.

You will learn how to value a stream of cash flows, compute the present value of future cash flows and compute the future value of current cash flows. You will learn to calculate the value of perpetuities and annuities and answer questions like, how large of a fund do you need to produce $30,000 annually in perpetuity (an endowment), or what will be your monthly retirement benefit if you achieve your savings target, or better yet, how much money do you need to save for retirement to maintain your desired standard of living. Once you understand the time value of money we will apply it to capital budgeting decisions. Organizations invest their profits into projects that hopefully add more profits and jobs. The time value of money is a tool to determine which projects are going to produce the best return over time. The time value of money is the most powerful and important financial concept you will learn.

Resources

• Modules:
  • Capital Budgeting
  • Risk and Capital Budgeting
  • Additional Detail on Present and Future Values
  • Identify and Describe Current Liabilities
• Bible

Learning Module Activity Path: Time Value of Money

DEVOTIONAL

Matthew 25: 14-24

Devotional Introduction

INTEREST ON INTEREST

The time value of money is the most important concept taught in this course. It is the foundation for much of the analysis that is done in corporate finance. Compound interest is the reason that as individuals we can prepare for retirement. Figure 2 on page 615 of the textbook shows how a $1,000 investment grows to over $6,700 in 20 years.

Another perspective is to ask how long does it take for money to double in value. The rule of 72 says that you can divide the earnings rate by 72 and the answer is how long it takes money to double. If you can earn 10%, your money would double every 7.2 years. So $1,000 becomes $2,000 in 7.2 years, $2,000 becomes $4,000 in the next 7.2 years, and so on.

Businesses and people make financial decisions based on the time value of money. Jesus understood the time value of money and talked about it in the parable of the talents. The master was pleased with the two servants who invested the money he entrusted to them. The third servant buried the money instead of investing it to earn interest. The master was not pleased and took the money from the third servant.

God expects the wise investment of the resources he has entrusted to us, whether it is money, or a particular skill. He expects us to use our talents to help others. And he expects us to make sound investment decisions in our professional roles.

Upon completion of this assignment, you should be able to:

• Incorporate Biblical and ethical principles into capital budgeting.

Resources

• Website: www.biblestudytools.com
• Textbook: Horngren’s accounting (11th ed.); Fundamentals of corporate finance (3rd ed.)
• Bible

Instructions

1. Review Figure 2 on page 615 of the textbook.
2. Read Matthew 25: 14-27.
3. Questions to consider:
   1. How does the Parable of the Talents relate to time value of money decisions?
   2. How can you apply the words of Jesus found in Matthew 25: 14-27 to make sound business decisions?
   3. What time, talent, or treasure in your life should be devoted to serving others?

READ, REVIEW, AND CHECK FOR UNDERSTANDING:

Capital Budgeting

Risk and Capital Budgeting

Additional Detail on Present and Future Values

Identify and Describe Current Liabilities

ASSESSMENT ONE

Instruction

Assessment One Instructions

1. Complete all previous activities in the Learning Module Path: Capital Budgets.
2. Select one topic from the Learning Module: Capital Budgets.
3. Create a video journal and address these points:
   1. As an entry-level professional.
   2. As a mid-level professional.
   3. As an executive-level professional.
   1. Identification: Identify the topic and explain why you believe the topic is important.
   2. Explanation: Explain the calculations or concepts, and how it can be used in decision-making.
   3. Application: Assuming your audience knows nothing about the topic, explain how to apply it:
   4. Ethics: Identify 1 ethical issue related to this topic and explain how you would address it.
4. Process
   1. Develop a rough idea of what you want to do.
   2. Create a storyboard to further organize and refine your thoughts.
5. Requirements:
   1. The video should be between 5 minutes and 7 minutes long.
   2. A minimum of 7 slides. You may choose any form of presentation software. You will post the URL for the instructor to review. 1 slide for the introduction and 1 slide for references with at least 5 for the body.
   3. A minimum of 2 references from the Skyepack modules associated with this Learning Module.
   4. A minimum of 1 reference from the Bible.
   5. Submit a Word document with your name and the URL for your presentation in submit assignments.
6. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor using the Capital Budgets Assignment Submission Page by the end of week 4.