Question

Explain why it might be important to consider finance (TVM) concepts when applying profit maximization rules like MC=MR to processes that take a lot of time, like farming?

Answer 1

It is important to consider financial time value of money concept and application of profit maximization rule like marginal cost will equal to marginal revenue in case of processes like farming because when they will be receiving their income and revenues in the longer period of time, they should be applying the time value of money concept in order to discount their cash flow that the present value so that they can have a better picture of comparison of reveniedyhjjjused with the cost at the present value and then they can decide whether to accept the project or not.

processes like farming generally have long term cash inflows associated with it and it should be trying to discount the cash inflows at the present value in order to have a better picture of the overall position of the business and hence it will help in better decision making because the cash flows are truly reflected at the present value after ascertainment of all the effect of inflation and other deductions so it will help the the participants in order to analyse the projects better through applicability of the concepts like time value of money.