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WK3-DQ8 corporate managers

Propose two (2) methods in which time value of money can help corporate managers in general. Examine the pros and cons of a sinking fund from the viewpoint of both a firm and its bondholders.

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Net Present Value– Direct measure of money contribution to stockholders. The Net Present Value is a great method to determine if an investment is worthy or not. The decision tool is easy for corporate managers to understand and customize if there will be a gain or loss for the investment in question. Corporate managers can do a side by side comparison of investments to determine which has the highest Net Present Value.

Internal Rate of Return– Shows the return on the original money invested. The Internal Rate of Return method recognizes time value of money and utilizes cash flow. The method is transparent and clear to understand. The highest Internal Rate of Return is the winning investment. These two methods can help corporate managers in general for capital budgeting.

Sinking Funds Firm View Point:

Pros:

Pro-active in addressing debt

Long-term debt management

Reduce costs & debt

Established business that will not close their doors a week later

Raise Capital

Cons:

Lose expected returns

Reinvest money elsewhere at a lower price

Sinking Funds Bondholder View Point:

Pros:

Protection on issues in a timely fashion

According to Brigham & Ehrhardt (2014), “Although sinking funds are designed to protect

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