question archive Explain two decisions a CPA might make using the time value of money? Include specific examples in your post
Explain two decisions a CPA might make using the time value of money? Include specific examples in your post
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Explain two decisions a CPA might make using the time value of money? Include specific examples in your post.
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- Better to invest in the financial market than to save money in the bank. This is a trend where CPA's used today in order for them to manage time value of money of their savings and to earn a higher extra income in the future. Furthermore, this is more practical type of decision making made by CPA's because they chose among two alternatives where they choose whether they will invest their money on stocks that can make their money double through proper financial management or save their money in the bank with a rate of return of 0.005 annually. They came up with the decision to invest rather than to save because they believe that inflation rate is increasing every year where the interest income earned in the bank is not sufficient to cover up the increase in the inflation rate rather they would invest in the financial market because interest rate they earn their varies in the inflation rate of a certain country has. For example, A CPA has a saving amounting to 500,000 in the year 2015 and he is stuck with the decision whether to save in the bank or invest in the financial market, where he considered the importance of Time Value of Money to arrive in a certain decision. If he will save in the bank, he will only received an interest income annually at 0.005 where it will have an additional 2,500 in his savings annually while if he will invest in stocks and he got 100,000 shares at 5 then when stock prices went up to 10 then the value of his share is 1,000,000 and with that his money will doubled. With the said scenario, given that the inflation rate annually is at 5% then the best alternative to suffice the said increase in the inflation rate is to invest because the return is 200% where it is over than the 5% while saving your money in the bank with a return of 0.5% which is lower than the 5% inflation rate.
- Buy Properties that appreciate like land today. This type of decision is a common decision always a CPA recommends to their clients because they believed that land always appreciate its value overtime where we can see that time value of money is considered in the said decision. Furthermore, CPA believed that land is the only asset that its value appreciates over other type of assets. In addition, time value of money is applied here because value of land today may differ in the future due to the effect of inflation rate. For example, in the year 2015 the value of the land is at 500,000 per hectare and that time a CPA bought 2 hectares of land that amounts to 1,000,000 and when 2019 came, four years after the value of one hectare is at 2,000,000 where the CPA is happy because the value of his land in 2015 tripled and if he wants to sell that in 2019, he will earn an additional 1,500,000 income which is the difference of 2,000,000 and 500,000 if he will sell only one hectare of his land.
