Question

What are possible drawbacks associated with not considering opportunity costs and time value of money when making financial decisions?

Describe risks that you might encounter when making financial decisions over the next few years.

Answer 1

Opportunity cost is the cost of next best alternative. And the time value of money is that the present value of the money that is received in future is less than that. There are various drawbacks of not considering the opportunity cost and the time value of money while making financial decisions that are with out considering the opportunity cost and time value of money it does not show the actual real cost or profit from the projects . And one benefit of opportunity cost is that it helps to judge the comparable projects if we can not consider opportunity cost than we are not able to compare . The opportunity cost may have a significant value even though it is not in monetary terms so if we ignore the time value of money and opportunity cost we can not correctly value the project . Time is very valuable these days if we ignore the opportunity cost and time value of money it shows that our time has no other value.

The risks that encounter while making financial decisions are inflation risk , interest rate risks , economic risks , personal risks etc.

Inflation risk is the risk of purchasing power risk as in future the value of money may decrease so the value of investment may decrease

Interest rate risks is the risk that is associated with the risk of change in the market interest rates

Economic risks is the risk of changing macro economic condition it includes the risk of change in technology or government regulations etc.

Personal risks is the risk of person related to the financial loss or increasing in expenses etc..

These are the risks that might encounter while making financial decisions of the next few years