National University of Modern Languages Islamabad

Name: Abrar Ishaq

Roll No: 9201023
Program: BBA (Hons) Morning
Class: BBA5A Morning
Subject: Financial Management

Assignment: No.01
(Questions Based)
Submitted to: Dr. Ali Burhan Khan
Submission Date: 25th October 2022
QNo.1 Why the time value of money concept is very important in
Finance?
Ans: Time Value of Money (TVM) is a fundamental financial concept, stating
that the current value of money is higher than its future value. Thus, it suggests that
a sum of money in hand is greater in value than the same sum of money received in
the next couple of years.
Financial firms use this idea of TVM in Finance for the following purposes:
i. The concept of the time value of money can help guide investment
decisions. For instance, suppose an investor can choose between two
projects: Project A and Project B. They are identical except that Project A
promises an RS1 million cash payout in year one, whereas Project B offers
an RS1 million cash payout in year five. The payouts are not equal. The RS1
million payout received after one year has a higher present value than the
RS1 million payout after five years.
ii. It helps in comparing the investment alternatives available in the market.
iii. Investors assess the returns and other conditions to make a final decision on
what option to choose.
iv. Investors choose the best investment proposals based on the evaluation,
considering the TVM.
v. Lenders decide the interest rates for loans, mortgages, etc., based on the
present and future value of an amount.
vi. The value of money, when known, helps in fixing appropriate wages and
prices of products.
vii. In addition, the changing value of an amount also plays a considerable role
in determining when a particular investment matures or when to repay a loan
amount, etc.
viii. Pension fund managers, for instance, consider the time value of money to
ensure that their account holders will receive adequate funds in retirement.
ix. The three main reasons that make TVM an important concept are – inflation,
risk or uncertainty, and liquidity. Inflation is the loss of purchasing power
caused by the deteriorating future value of money.
x. Risk or uncertainty is the difference between what is received as an
outcome and expected when the investment or expenditure was made.
xi. Liquidity makes it easy for owners to sell their assets for cash as illiquid
assets are difficult to sell.
QNO.2 Suppose you are a financial manager in a firm. What
Investment, Financing, and Asset Management Decisions you can
take? Provide some examples.
Ans: Being a financial Manager I will be very careful while taking above
mentioned decisions.
Let’s suppose I am a manager at Nestle company and the company has decided to
increase its production facilities in a city of Pakistan named Lahore and I am the
financial manager of the company I have to take the required three decisions and I
will take decisions in the way explained below: -
Investment Decision
Here I will see the long-term and short-term advantages of my investment decision.
I will measure how much money will be required to purchase new production
plants and new Machinery for new production facilities. I have to evaluate the risks
and returns associated with these plants. Which plants and machinery will be
returning a high profit, I have to evaluate and decide to protect the company from
loss and more profit.
Financing Decision
Here I will decide how I will collect the money for the required project. I see
whether to go for equity or debt financing. I will go for 70% equity and 30% debit
financing to purchase the required plants and support the project. I have to make
these decisions while keeping in view the balance sheets of the company as well.
Asset Management Decision
Here I have to deal with day-to-day and routine matters. As the company is
increasing its production facilities so it will require new employees. I have to make
their salaries, daily wages, maintenance of plants, and expenses related to these I
have to handle. How much cash is coming and how much cash is going everything
related to it I have to see. The expense of the mechanic who maintains the plants, I
have to manage that as well.