Question

1. How do you think today's low-interest-rate environment is impacting the time value of money? How might this change the value of an asset or a liability?

2. What is the relationship between the concepts of net present value and shareholder wealth maximization?

Answer 1

Question 1

A low interest rate environment will generally result in lower discount rates which increase the present value of future cash flows. You can see this clearly in the market value of bonds. As interest rates decline the price of the bond, which is the present value of its interest payments and terminal value, rise. We’ve certainly seen that over the past few months. Thus, the present value of a liability with fix future payments will get increased and the value of the asset with fix future receivables will also be increased.

Question 2

It is the process of maximizing the net present value of the invested money by shareholder than the expected value after the time period of investment. The net present value (NPV) is a technique of identifying which project is to be selected. Projects that have a higher NPV are selected by the organizations. Thus, selecting a project with high NPV will in turn increase the Shareholder's Wealth.