The Time Value of Money and Calculating Present and Future Values of Lump Sums

Final Course Project
University
Date
Milestone 1
Time Value of Money: Implications:
The majority of financial choices involve benefits and costs that occur at various times in the course of life. Project investment initiatives require capital expenditures upfront but provide advantages in the long term. Also, a change in interest rate affects the investment's cash flow in that an increase in the interest rate causes a rise in the project cash inflows in the future, which makes the company earn more profit. This section demonstrates how to compensate for the time difference when making a choice based on the Valuation Principle. (Higgins, 2017)
Comparison between present value (PV) and future value (FV) is the most effective way to demonstrate the concept of time's worth of money and the necessity of trying to charge or paying an extra risk-based interest rate. To put it another way, the money one has now is valued more than the same money one will have tomorrow. The future value may refer to future cash inflows from investing today's money, or it can refer to a future payment necessary to return today's money loaned (Corporate Finance Institute, 2019). When calculating the future value (FV), it is essential to consider the worth of a current asset in the future and the anticipated pace of growth. The FV equation is based on the assumption of a constant rate of change and a single initial payment that remains unchanged throughout the investment's lifespan. When using the FV calculation, the financial manager at Pepsi may forecast, with differing levels of accuracy, the sum of money that different types of investment opportunities can earn. The present value (PV) of a future amount is the current worth of the future stream of cash flows by using a defined interest rate (James, 2021). The present value is calculated by taking the future value and subtracting a rate of interest that might be obtained if the money were invested. The future value of investment shows the company how much it will be worth in the future, whereas the present value shows the company how much income it will need now to earn a given amount in the future. (Ruan, 2019).
In doing computation of the time value of money in the given assignment, it shows that the choice made by Pepsi Inc is the same no matter if the value of the investment is expressed as a dollar in one year or as a dollar now. For example, in the case of Pepsi, the present value cash flow is $6,991,000 at the beginning of the year in question 3, and at the end of the year, it is ($6,991,000(1 +0.07) 1= )$7,480,370. The two outcomes of present and future value are comparable, despite being portrayed as values at separate periods in time. When the worth of investment is expressed in terms of money now, it is referred to as the present value investment. When expressed in terms of money in the future, it is referred to as the future value (FV) (Cupkovic, 2022). One interpretation of the above computation is that $1/ (1 + rate) = 1/1.10 = $0.909 represents the price of $1 today at the end year. To put it another way, one may "purchase" $1 in the next year for less than 91 cents. It is important to note that the dollar's worth is less than...