Portfolio Assignment Unit 2 Bus 5111

A wise saying by Theophrastus, a Greek philosopher is that “Time is the most valuable thing a
man can spend” (RightAttitudes, 2023) and if this is colligated with the statement “Time is
Money” as mentioned by Benjamin Franklin (1748), we can conclude that indeed every penny
earns more with the passage of time. This leads us to a concept known as the Time value of
money (TVM)
The concept of TVM says a sum of money in the hand is worth more than the same sum to be
paid in the future due to its earning potential as of now. (Fernando, 2022). The nature of every
human goes again delayed gratification - postponing an immediate gain in favor of a greater and
later reward. For me to wait, there must be a gain or interest that justifies the waiting. For
instance, I preferred to accept $100 dollars now than wait for another year to get $101 but, will
rather wait for one year to get $120 instead. There are reasons why the money earn today will
always be considered more valuable than in the future.
1. Inflation-All over the world, the rate of inflation has averaged around 3% per year and this
means the value of every currency erodes every year. The price of goods bought last year can
never be the same this year. So, to avoid this declining purchasing power, it is better to earn and
spend the money now on goods than wait till the future when the money would not be sufficient
to buy goods of the same value.
2. Investment – Money if properly invested will yield more with time. The stock market is a
good way to invest but for fear of a fall in stock price, riskless treasury security can be purchased
to increase the value of money
3. Risk Averse- The fear that the money may eventually not be available as promised for some
reasons beyond anyone’s control such as death, or force majeure. Etc. It is best to have the
money in hands
Another crucial concept that explains the time value of money is Opportunity cost. Opportunity
cost is the alternative forgone. The money we earn today can only grow if properly invested to
yield positive returns. If the same money is promised to be paid in the future, it will definitely
not be the same due to value lost and will require interest earning for it to be the same value.
Hence the opportunity cost of earning money today is the forgone alternative of receiving the
same money with interest on it in the future.
Time Value of Money Formula
The time value of money calculation is also referred to as the present discounted value and it is a
way of obtaining the current value of future cash flow. where: FV=Future value of money,
PV=Present value of money, i=Interest rate n=Number of compounding periods per year,
t=Number of years
FV= PV (1+i/) ^t
This formula is used when the compounding period is just once a year, we can now obtain the
present value by writing
PV =FV X 1/(1+i) n .The present value of the future cash flow can be obtained using this
formula.
However, If the number of compounding periods is increased to quarterly, monthly, or daily, the
ending future value calculation is:
FV= PV (1+i/n) ^nt
PV =FV X 1/(1+i/n) nt the present value of the future cash flow (within the year) can be obtained
using this formula. Organizations use the value of money formula for Discounted cash flow
(DCF) analysis and the net present value
NET PRESENT VALUE (NPV)
One of the important financial tools is Net present value and it is calculated using the present
discount rate. The net present value method of evaluating investments adds the value of today’s
investment (cash outflow) and the present value of all future cash inflow (Heisinger & Hoyle,
2012). If the NPV is positive for a project, it is worth pursuing and if it is negative, then it is
rejected.
The formula used to obtain the NPV is summarized as NPV = R1+R2+R3+ ...R7. − Initial
Investment, where R= cash inflow
The present value interest factor (PVIF) is obtained for all the years and then used to multiply the
cashflows. The cash outflow PVIF is one because it is at the present time and not future
payment. The value of the amount of outflow is subtracted from the total sum of inflows to
obtain the NPV
PVIF = 1/ (1+r) ^n. The discounting factor (r) is the interest rate which is actually the weighted
average cost of capital of the company.
Criteria for project selection using NPV are summarized below
If NPV> 0 [ If NPV is positive, accept the project]
If NPV< 0 [ If NPV is negative, reject the project]
If NPV= 0 [ If NPV is zero, accept the project considering other intangible benefits]
See the following example using Microsoft Excel
The NPV is calculated using the excel formula =K11+NPV(L8, L12:P12) =$19.41. The value is
positive which means the project is viable and should be embarked on.
I am doing quite well in this course because up till this moment, I understand the concept and
the calculations involve are quite easy to assimilate.
In conclusion, I really understand the concept of this week's assignment and it feels great
knowing this very important accounting tool. I am optimistic that the following units in the
course will be more exciting and the concept will be easy to grasp.

Franklin, B. and Hall, D. (1748, July 21). The American Instructor: or Young Man’s Best
Companion. … George Fisher. https://founders.archives.gov/documents/Franklin/01-03-02-
0130
Fernando, J. (2022, September 28). Time Value of Money Explained with Formula and
Examples
Heisinger, K., & Hoyle, J. B. (2012). Accounting for
Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html
RightAttitudes. (2013). Theophrastus (Greek Philosopher) Inspirational
Quotations. https://inspiration.rightattitudes.com/authors/theophrastus/.

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A wise saying by Theophrastus, a Greek philosopher is that “Time is the most valuable thing a

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