Accounting Analysis

Accounting Analysis

Introduction

In this paper, we will choose an asset (298W, 1967 Corvette Convertible), which we would like to buy in five years. First, we will illustrate the funds that are required to be saved at the end of each year. Next, we will invest the yearly savings somewhere else (i.e. bank) and find out the yearly earnings. Finally, we will examine the difference between the two alternatives. This will be done through calculating opportunity cost.

Discussion & Analysis

We will pick 298W, 1967 Corvette Convertible to be purchased in five years, the current price of the car is $125,000 and interest rate is 0.75. The rest of the calculations are shown below:

Asset

 

298W, 1967 Corvette Convertible

 

Price ($)

 $125,000

 

 

PV of Asset

$125,000

Interest rate

0.75

Yearly Savings

cumulated

Savings

218750

$93,750

382812.5

164063

669921.875

287109

1172363.281

502441

2051635.742

879272

With reference to the above calculations, it can be said that the notion that money has a time value is one of the fundamental concept of finance. Imagine that we are in an environment of certainty and the State borrows $ 1,000, and, in turn, promises to return safely $1040 within a year. This means that, in an environment of certainty, now $1,000 is equivalent to 1,040 within a year or whatever it is, the amount of money within a year is 4% higher than today.

Therefore, in this environment, the rate of interest (4% in our example) represents the relationship between the exchange values of money at two certain times. Thus the rate of interest provides the tool we need to adjust the value of all cash flows to a single moment, regardless of when they are expected to occur (Smal, 2004).

But our real world is uncertain, i.e. we cannot predict accurately the value of an amount in the future. We can have a more or less about its value, for example, may think that $ 1,000 today can worth between 1030 and 1,050 dollars within a year (the scattering of values between 1030 and 1050 called risk). In this situation the appropriate rate of exchange between having a sum of money at this time and the possibility of having it in a later date will include not only the time value of money but also an additional premium to cover the uncertainty involved, i.e. the risk. Anyway, for now let's assume, for ease of understanding, that we are in an environment of certainty (Scott, 1984).

According to the ideas presented by the American economist Irving Fisher, the type of ...