Time Value Of Money Milestone One

Time Value Of Money Milestone One Time Value Of Money Please Fill I

Calculate time value of money figures and use the results to support your explanations of the present and future value of United Parcel Service. Complete your calculations on the designated tab in the Final Project Excel Workbook.

Create a separate Word document for your justifications. Specifically, the following critical elements must be addressed:

Sample Paper For Above instruction

Introduction

The monetary valuation of a company plays a crucial role in strategic financial decision-making. Utilizing the time value of money (TVM) principles allows investors and managers to assess the present worth of future cash flows, facilitating sound investment and operational decisions. This paper evaluates the United Parcel Service (UPS) using TVM analysis based on its 2017 annual report, emphasizing the impact of risk changes and potential future valuation scenarios.

Calculating the Present Value of UPS Using Free Cash Flows

The initial step in this analysis involves calculating the present value (PV) of UPS based on its free cash flows (FCFs) for 2015, 2016, and 2017. The FCFs are derived from the company's annual report, which details the net cash generated by operating activities after accounting for capital expenditures and dividends. Assuming an 8% discount rate—the specified interest rate—the PV of each year's FCF is computed using the formula PV = FVN / (1 + I)^N, where FVN is the future cash flow for year N, and I is the discount rate.

Applying the formula to each year's FCF, the PVs are determined. For instance, if the FCF in 2015 was $X million, then PV = $X / (1 + 0.08)^1. The summation of these PVs gives the total present value of the company's cash flows across the three-year period. This valuation helps gauge the company's market worth based on its operational cash flows.

Impact of Risk Changes on Company Valuation

To understand how changes in risk influence company valuation, the analysis considers a hypothetical decrease in FCFs by 10% annually for 2015-2017. Reduced cash flows decrease the PV, reflecting increased risk or operational challenges, thereby diminishing the company's valuation. Conversely, an increase in risk, represented by a decrease in cash flows, raises concerns about future profitability and investment desirability, which is fundamental in risk assessment and strategic planning.

Estimating Future Purchase Price

Another vital aspect involves estimating what a potential buyer should pay for the company after three years, based on the current PV. Using the initial PV calculated and projecting the company's value in three years involves discounting future cash flows or anticipated valuation figures, considering growth rates and risk adjustments. This quantification aids buyer-seller negotiations and investment decisions.

Implications of Changes in Present Value and Risk

The shifts in PV caused by risk alterations influence managerial decisions, such as investment, divestment, or strategic restructuring. A significant decline in PV signals higher risk perception, potentially leading to restructuring or cautious investment. From a financial management perspective, these analyses inform risk mitigation strategies and capital allocation, emphasizing the importance of rigorous risk evaluation in operational and strategic contexts.

Conclusion

Employing TVM principles to evaluate UPS showcases the importance of future cash flow assessments, risk analysis, and scenario projections in corporate finance. These calculations underpin decision-making processes, helping stakeholders to determine company valuation, predict future acquisition prices, and understand risk implications, which collectively enhance strategic financial planning.

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