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In: Finance

Respond to you thoughts on this discussion in 150 words It is important in today’s world...

Respond to you thoughts on this discussion in 150 words

It is important in today’s world to be able to understand present and future value in the monetary system when making any decisions. Due to the need of understanding the calculations, I have chosen the green side for this discussion. One reason is that even outside of a business environment, the use of understanding the calculations of present and future value are necessary. An example that comes to mind is one of my coworkers and his finance have decided to buy a house. He has had to determine what the future value of his mortgage payments would be today to make the decision on what would be the best option home for him and his finance. This requires him to have more of an understanding of the calculations that the tools used to make these calculations. Another example that comes to mind for this side is equipment. My father, though he is employed by the military, also runs a farm. He has spent numerous occasions calculating the resent value of purchasing equipment and the payments that come with the purchase. One of the reasons that I have chosen the green side, is that he may understand that he may be pay $650 in six months for a tractor, but what would that payment be considered today. This ultimately means that though he has the tools required to perform the calculations needed; without the knowledge of how the calculations work within the monetary system, he would not understand the significance of the calculation itself. Technology is a great tool to use when working with equations such as the present value formula; however, just like there is human error, technology also could have errors that can change the value of the calculation that could end up causing people to have slightly false information. It would benefit people to have an understanding of the formulas in the monetary sense rather than just putting the information into a computer system or calculator and using that answer without knowledge of why we use the calculation.

Solutions

Expert Solution

I agree with the thoughts of the author that there are various uses to time value calculations. Besides knowing various uses such as mortgage computations, retirement calculations, etc it is also important to know the logic behind the calculations rather than relying on technology and blindly using the figures that come up. The person making the calculations must know which area of the TVM computations is to be calculated. For instance should he calculate the present value of a futre payment, present value of annuity or future value of a sum or annuity. Also knowing if the annuities become due at the beginning or end of a period is mandatory.

One also needs to have correct estimates of the factors used in the calculations .For example, the interest rate that is selected has a great significance and any changes or incorrect estimates will totally alter the results. Hence making the estimates carefully is key in the calculations.


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