Question 3
Present value (PV) is the present rivulet of cash flows assuming a particular rate of return or the worth of a future sum of money. Cash flows that are prepared for future use are discounted at the discount rate, therefore, if the discount rate is more it implies that the present value of the future cash flows of a company will be lower and vice versa. Hence it is important for companies to determine the appropriate rate since it is crucial when the future cash flows are being valued, despite being obligation or earnings ( Kashyap, 2014) .
FV = PV ( 1 + i ) n
FV = 431.64 0 ( 1.000 + 0.1200 ) 5
FV = 760.8700
Based on the calculation above it was evident that Home Depot Inc should sell the company to the potential buyers for $760.87 million or more than $760.87 million because the present owner of the company will gain more money from their principals compared to when the company is sold at lower price ( Chan & Rate, 2018) .
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B. Implications of The Change in Present Value Based on Risk
The present value (PV) offers a foundation for evaluating the fairmindedness of any forthcoming liabilities or financial aids. For instance, a forthcoming money rebate discounted to PV could or could not be worth having a possibly higher purchase price. At zero percent financing, the same calculation applies when purchasing a car. Reimbursing some interest as a substitute for a lower sticker price might work out well for the purchaser than disbursing 0 percent interest on a higher sticker price ( Chan & Rate, 2018) .
In our scenario, the discount rate is the consequences of the alteration in present value grounded on risk. The discount rate is used in a discounted cash flow which is used to determine the present value of future cash flows of Home Depot Inc . Moreover, the discount rate has a connotation to the Home Depot Inc because it can be used by the company to determine the firm’s income stream and similarly epitomize the projected rate of return to make a company purchase. Therefore, as a manager, I can conclude that if Home Depot Inc has a high discount rate, it means that the present value of the firm would reduce, similarly if the Home Depot Inc has lower discount rate then the present value of the firm shall reduce ( Kashyap, 2014) .
C. Recommendation Would You Make About Purchasing the Company
PV is employed in reference to the future value (FV) and the contrast of the future value with that of the present value demonstrates the principle of time value of money and the importance for paying or charging interest rates that that has additional risk. Basically put, the money’s present value is more than the same money tomorrow since as time passes the financial time attached to it and costs or rewards are required for possessing or using present's money. The future value could be associated with the future investment cash inflows basing on investing the present’s money or payment outflows that results from accepting the financial assistance of the present’s money ( Kashyap, 2014).
In reference to our scenario, founded on the future value in five years, I shall advocate the firm to make a choice of capitalizing on the interest rate of 12 percent ( Chan & Rate, 2018) . Though Home Depot Inc will have to spend their principals a smaller amount than capitalizing on the interest rate eight percent, Home Depot Inc would get more uncertainty in addition. If Home Depot Inc will like to obtain an additional return, the company will have to capitalize on the interest rate of 12% to obtain $760.87 million. Therefore, endowing on the interest rate 12 percent will be an excellent choice for Home Depot Inc investment.
References
Chan, K., & Rate, E. A. I. (2018). & 6 The Time Value of Money. Financial Management .
Kashyap, A. (2014). Capital Allocating Decisions: Time Value of Money. Asian Journal of Management , 5 (1), 106-110.
