8/20/2019 U4 Replies

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D1-R

Right Sophia, time value of money is actually of crucial importance to business

these days specially while making investment decisions because unable to

correctly evaluate the worth of a particular commodity can lead to falseinvestment decisions thereby, resulting in huge losses in future. The ination

over time erodes the actual value of the money and so it needs to be

continuously adjusted for the interest rates.

 That is actually interesting the way you have explained the way of assessing the

future worth of ones investment. !bviously, a "#$$ worth today will not have

the same value in future due to increasing ination rates and other risk factors.

%oreover, you are right one needs to assess the bene&ts achieved over the initial

costs incurred. Since T'% is important in investment decisions, so applying this

decision rule can be extremely helpful to an investor.

D2-R

(n order to accept a project, an investor must always see that the )*' should be

greater than +ero. That is the amount invested initially must be able to general

higher future cash ows so that it results in overall pro&t for the investor. This is

one of the most powerful tools used for decision making but then again oseph

like you -uoted it will also depend on the situation and the preference of investor

as to which project he chooses out of the three. e might prefer the one having

higher (RR value out of the three even if reduces the *' of cash ows or even if

that project has longer duration.

!ther things that an investor must consider while making a decision are the

pro&tability index and the (RR. e must choose the project with the highest *( or

the one whose internal rate of return is greater than weighted average cost of

capital. This is because such project will yield in higher returns than what the

company o/ers.