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2 pages/≈550 words
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Style:
APA
Subject:
Accounting, Finance, SPSS
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Essay
Language:
English (U.S.)
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Topic:
Time Value of Money: Implications and Future Value
Essay Instructions:
In Milestone Four, using the financial information you prepared from your selected company, you will submit a draft of the Macroeconomic Items section of the
final project, along with your supporting explanations.
See the other tabs of the attached worksheet as needed -- my selected company is PepsiCo.
Prompt: Provide an explanation of the impact of external factors on the financial position of your selected company. Use the designated tab in the
Excel Workbook (which is linked to in your course) to demonstrate the implications of interest rate changes on at least one of the calculations you performed in
Milestone One.
Specifically, the following critical elements must be addressed - you must use the attached word document.
V. Macroeconomic Items: The CEO of your selected company is convinced that financial analysis should hinge only on what is happening internally within
the company. Convince him otherwise based on the following:
A. Analyze the implications of interest rate changes on any of the calculations you performed. Be sure to substantiate your claims.
B. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial
variables, or its overall portfolio management? Be sure your response is supported by evidence through research, references, and citations using
proper APA style.
C. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Be
sure to justify your reasoning through research, references, and citations using proper APA style.
Rubric
Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document, not including your calculations, which should be
completed in the Final Project Excel Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to
APA style.
Essay Sample Content Preview:
Time Value of Money: Implications and Future Value
The majority of financial choices involve benefits and costs that occur at various times in the course of life. Project investment initiatives require capital expenditures upfront but provide advantages in the long term. Also, a change in interest rate affects the investment's cash flow in that an increase in the interest rate causes a rise in the project cash inflows in the future, which makes the company earn more profit. This section demonstrates how to compensate for the time difference when making a choice based on the Valuation Principle. (Higgins, 2017)
Comparison between present value (PV) and future value (FV) is the most effective way to demonstrate the concept of time's worth of money and the necessity of trying to charge or paying an extra risk-based interest rate. To put it another way, the money one has now is valued more than the same money one will have tomorrow. The future value may refer to future cash inflows from investing today's money, or it can refer to a future payment necessary to return today's money loaned (Corporate Finance Institute, 2019). When calculating the future value (FV), it is essential to consider the worth of a current asset in the future and the anticipated pace of growth. The FV equation is based on the assumption of a constant rate of change and a single initial payment that remains unchanged throughout the investment's lifespan. When using the FV calculation, the financial manager at Pepsi may forecast, with differing levels of accuracy, the sum of money that different types of investment opportunities can earn. The present value (PV) of a future amount is the current worth of the future stream of cash flows by using a defined interest rate (James, 2021). The present value is calculated by taking the future value and subtracting a rate of interest that might be obtained if the money were invested. The future value of investment shows the company how much it will be worth in the future, whereas the present value shows the company how much income it will need now to earn a given amount in the future. (Ruan, 2019).
In doing computation of the time value of money in the given assignment, it shows that the choice made by Pepsi Inc is the same no matter if the value of the investment is expressed as a dollar in one year or as a dollar now. For example, in the case of Pepsi, the present value cash flow is $6,991,000 at the beginning of the year in question 3, and at the end of the year, it is ($6,991,000(1 +0.07) 1= )$7,480,370. The two outcomes of present and future value are comparable, despite being portrayed as values at separate periods in time. When the worth of investment is expressed in terms of money now, it is referred to as the present value investment. When expressed in terms of money in the future, it is referred to as the future value (FV) (Cupkovic, 2022). One interpretation of the above computation is that $1/ (1 + rate) = 1/1.10 = $0.909 represents the price of $1 today at the end year. To put it another way, one may "purchase" $1 in the next year for less than 91 cents. It is important to note that the dollar's worth is less than $1 since cash in the future is valued less now because it gives the discount at which someone might acquire money in the future. The following figure 1/ (1 + r) is referred to a year discount factor. In the context of investments, the interest rate is often known as the discount rate. (Kumar, 2016)
Time Value of Money: Future Value
When comparing the rate of 7 percent to the rate of 5 percent, the financial manager should advise the buyer to acquire the investment since the rate of 7 percent indicates that the investment has a significant profit on the return. An increase in interest rates is desirable for various reasons. The most basic and rational reason is that higher interest rates will result in the buyer earning more cash over time. A return on investment is a financial ratio that evaluates the profit or loss created from an investment compared to the amount of money invested in the venture (Higgins, 2017). Companies may better understand a future project or venture's return on investment by comparing what they spent to what they receive back. When a buyer compares several projects and the efficacy of different businesses, the interest rate is frequently utilized to make financial choices. It provides an indicator to the buyer of the overall development of an investment from the beginning to the end by considering the cash flow streams generated as a result of an activity. The interest rate on investment also indicates how well the project works and if a business uses its resources efficiently by informing buyers how much money each pound spent on that project generates (Ruan, 2019).
Milestone 2
Stock Valuation
PepsiCo's rate of return on investment is -13.06% and -5.64% for 2020 and 2019, respectively.
The effect is that the shareholder value will be reduced by the negative ROI of -13.06% and -5.64% for 2020 and 2019, respectively, therefore not achieving the company's goal of maximizing the shareholder value. Sustained positive returns on the capital employed are the main driver of shareholder value (Aligning Risk and the Pursuit of Shareholder Value, Risk Transformation, February 15, 2015).
The company's dividend policy is one in which it has been paying consecutive quarterly cash dividends since 1965, and does not hinder its strategies given that it has adequate financing to meet its capital needs (Form 10K, 2021). This financing includes debt financing and revolving credit facilities. Companies make choices as to the earnings fraction paid out as dividends and that which is retained (Garrett, n.d.).
Bond Issuance
The Present Value (PV) of the bond at issuance was -$300,000, when rates increased by 2% was -$257,363, when rates decreased by 2% was -$351,506, and when rates remained the same as at issuance was -$300,000.
One way for a company to raise capital is to issue stocks or bonds. Bond financing is a method to keep full control of the company and is most often less expensive than equity. A company can obtain bank financing as a loan or they can issue bonds. Bonds can be structured in many ways to obtain the desired result. PepsiCo has issued its first Green Bond in 2019 – this is a 30 year, $1 billion senior notes offering. With the proceeds, they are building a more sustainable food system via decarbonization, water and packaging. To date, they have allocated $858 million making progress towards their goals. (Green Bond, 2022)
The company is making efforts to retain a good credit rating so that it maintains low borrowing costs, and has readily available global markets. Therefore, it is issuing sufficient bonds to achieve the goals it has set.
Milestone 3
Capital Budgeting
The approach was to evaluate a single investment based on the (Present Net Value) NPV and Internal Rate of Return (IRR). To arrive at the net present value, we identified revenues that the project would generate over its life cycle and the earnings were as follows; $15,000,000, $17,000,000, $18,000,000, $19,000,000, and $18,000,000 in a period of 5 years. The operating cost remained constant over the period at $ 500,000. The depreciation of the equipment was on a straight-line basis at a rate of 20 percent for five years. The earnings before t...
The majority of financial choices involve benefits and costs that occur at various times in the course of life. Project investment initiatives require capital expenditures upfront but provide advantages in the long term. Also, a change in interest rate affects the investment's cash flow in that an increase in the interest rate causes a rise in the project cash inflows in the future, which makes the company earn more profit. This section demonstrates how to compensate for the time difference when making a choice based on the Valuation Principle. (Higgins, 2017)
Comparison between present value (PV) and future value (FV) is the most effective way to demonstrate the concept of time's worth of money and the necessity of trying to charge or paying an extra risk-based interest rate. To put it another way, the money one has now is valued more than the same money one will have tomorrow. The future value may refer to future cash inflows from investing today's money, or it can refer to a future payment necessary to return today's money loaned (Corporate Finance Institute, 2019). When calculating the future value (FV), it is essential to consider the worth of a current asset in the future and the anticipated pace of growth. The FV equation is based on the assumption of a constant rate of change and a single initial payment that remains unchanged throughout the investment's lifespan. When using the FV calculation, the financial manager at Pepsi may forecast, with differing levels of accuracy, the sum of money that different types of investment opportunities can earn. The present value (PV) of a future amount is the current worth of the future stream of cash flows by using a defined interest rate (James, 2021). The present value is calculated by taking the future value and subtracting a rate of interest that might be obtained if the money were invested. The future value of investment shows the company how much it will be worth in the future, whereas the present value shows the company how much income it will need now to earn a given amount in the future. (Ruan, 2019).
In doing computation of the time value of money in the given assignment, it shows that the choice made by Pepsi Inc is the same no matter if the value of the investment is expressed as a dollar in one year or as a dollar now. For example, in the case of Pepsi, the present value cash flow is $6,991,000 at the beginning of the year in question 3, and at the end of the year, it is ($6,991,000(1 +0.07) 1= )$7,480,370. The two outcomes of present and future value are comparable, despite being portrayed as values at separate periods in time. When the worth of investment is expressed in terms of money now, it is referred to as the present value investment. When expressed in terms of money in the future, it is referred to as the future value (FV) (Cupkovic, 2022). One interpretation of the above computation is that $1/ (1 + rate) = 1/1.10 = $0.909 represents the price of $1 today at the end year. To put it another way, one may "purchase" $1 in the next year for less than 91 cents. It is important to note that the dollar's worth is less than $1 since cash in the future is valued less now because it gives the discount at which someone might acquire money in the future. The following figure 1/ (1 + r) is referred to a year discount factor. In the context of investments, the interest rate is often known as the discount rate. (Kumar, 2016)
Time Value of Money: Future Value
When comparing the rate of 7 percent to the rate of 5 percent, the financial manager should advise the buyer to acquire the investment since the rate of 7 percent indicates that the investment has a significant profit on the return. An increase in interest rates is desirable for various reasons. The most basic and rational reason is that higher interest rates will result in the buyer earning more cash over time. A return on investment is a financial ratio that evaluates the profit or loss created from an investment compared to the amount of money invested in the venture (Higgins, 2017). Companies may better understand a future project or venture's return on investment by comparing what they spent to what they receive back. When a buyer compares several projects and the efficacy of different businesses, the interest rate is frequently utilized to make financial choices. It provides an indicator to the buyer of the overall development of an investment from the beginning to the end by considering the cash flow streams generated as a result of an activity. The interest rate on investment also indicates how well the project works and if a business uses its resources efficiently by informing buyers how much money each pound spent on that project generates (Ruan, 2019).
Milestone 2
Stock Valuation
PepsiCo's rate of return on investment is -13.06% and -5.64% for 2020 and 2019, respectively.
The effect is that the shareholder value will be reduced by the negative ROI of -13.06% and -5.64% for 2020 and 2019, respectively, therefore not achieving the company's goal of maximizing the shareholder value. Sustained positive returns on the capital employed are the main driver of shareholder value (Aligning Risk and the Pursuit of Shareholder Value, Risk Transformation, February 15, 2015).
The company's dividend policy is one in which it has been paying consecutive quarterly cash dividends since 1965, and does not hinder its strategies given that it has adequate financing to meet its capital needs (Form 10K, 2021). This financing includes debt financing and revolving credit facilities. Companies make choices as to the earnings fraction paid out as dividends and that which is retained (Garrett, n.d.).
Bond Issuance
The Present Value (PV) of the bond at issuance was -$300,000, when rates increased by 2% was -$257,363, when rates decreased by 2% was -$351,506, and when rates remained the same as at issuance was -$300,000.
One way for a company to raise capital is to issue stocks or bonds. Bond financing is a method to keep full control of the company and is most often less expensive than equity. A company can obtain bank financing as a loan or they can issue bonds. Bonds can be structured in many ways to obtain the desired result. PepsiCo has issued its first Green Bond in 2019 – this is a 30 year, $1 billion senior notes offering. With the proceeds, they are building a more sustainable food system via decarbonization, water and packaging. To date, they have allocated $858 million making progress towards their goals. (Green Bond, 2022)
The company is making efforts to retain a good credit rating so that it maintains low borrowing costs, and has readily available global markets. Therefore, it is issuing sufficient bonds to achieve the goals it has set.
Milestone 3
Capital Budgeting
The approach was to evaluate a single investment based on the (Present Net Value) NPV and Internal Rate of Return (IRR). To arrive at the net present value, we identified revenues that the project would generate over its life cycle and the earnings were as follows; $15,000,000, $17,000,000, $18,000,000, $19,000,000, and $18,000,000 in a period of 5 years. The operating cost remained constant over the period at $ 500,000. The depreciation of the equipment was on a straight-line basis at a rate of 20 percent for five years. The earnings before t...
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