M5.1.

1 Introduction to the Time Value of

Money

Introduction
The Time Value of Money concept emerges from the field of Finance and
can also be linked to the concept of opportunity cost. Read the content
below to learn more about this concept and how the value of money is
assessed as being valued higher in the present.
Time Value of Money
The Time Value of Money is the concept that having a given sum of money will hold
more value in the present than it will in the future. This is due to the potential earning
capacity of being able to utilize the money in the present or beginning to earn interest
earlier. In this way, having an understanding of the Time Value of Money is helpful in
making more effective investment decisions.
As an example, as the Product Manager for a large scale dairy-based company, Stella
has two choices: push for the development of a new yogurt line or the development of a
new ice cream line. Pursuing the yogurt line is projected to earn $1 million at the end of
Year 1, based on market demographics and consumer trends toward healthier lifestyle
choices. Instead, selecting to pursue the new ice cream line will also earn $1 million but
by the end of Year 5 due to competition from market saturation. Although both cases
will result in the gain of $1 million, these outcomes are not the same because the $1
million projected from the yogurt line could be invested to gain more interest. In
addition, if this product line is a hit, there could potentially be increased year over year
returns, meaning that by Year 5 it will greatly surpass the option of launching a new ice
cream product line. As previously mentioned, this concept also links with the idea of
opportunity cost, because Stella’s decision to pursue the new yogurt product line means
that the organization will forego the option of beginning a new ice cream line.
The key reason this principle holds true, that money has greater Present Value than
Future Value, is because there are uncertainties in the future. The value of money in the
future will decrease due to factors like inflation, and a sum of money in the present
could be invested leading to stronger future earnings.

Key Takeaways
 Any sum of money will have greater value in the present than it will
have in the future, which is the foundation of the Time Value of Money
concept.
 When conducting decision making, some of the factors that apply to
the Time Value of Money include future risks, preferences toward
present consumption, inflation, and investment opportunities.
M5.1.2 Present Value and Future Value

Introduction
A core component of understanding the Time Value of Money is an
understanding of Present Value and Future Value. In this Learning Activity,
you will read the definition of Present and Future Value, learn how this can
be calculated, and see the application of these formulas to real-world
examples.
Present Value and Future Value
When there is a set monetary goal in the future, the Present Value is the amount that
must be invested today to reach that desired goal. The Future Value is the monetary
amount that will be accrued if a certain amount of money is invested in the present. The
way in which these values are calculated will depend on additional factors such as the
rate at which the interest is compounded, if the deposited amount is a single lump sum
deposit, or if these values relate to a continuous income stream. The following are the
equations used in each of these cases.
Continuous Compounding of a Single Deposit n Times Annually
Future Value Present Value

Variables
FV = Future Value
PV = Present Value
R = Rate
N = Number of Times the Account is Compounded Annually
T = Years

Continuous Compounding of a Single Deposit

Future Value Present Value
 Variables
FV = Future Value
PV = Present Value
R = Rate
T = Years
e = Euler's Number - found on scientific calculators and Excel

Continuous Income Stream as the Deposit

Future Value Present Value

Variables
FV = Future Value
PV = Present Value
Amount of the Continuous Stream Deposit
R = Rate
T = Years Elapsed
t = Variable Being Sold
e = Euler's Number - found on scientific calculators and Excel

Through the use of calculus, there are ways in which economic and business concepts
can be quantified and calculated. The video below demonstrates the application of
calculus with integration to assess the Present Value and Future Value of both a lump
sum of money and a continuous income stream. There will be diverse financial
scenarios and solutions introduced.
Microsoft Excel also has built in functions for the calculation of Present Value and Future
Value based on diverse variables.

Key Takeaways
 There are different ways in which the Present Value and Future Value
are calculated, based on the context within which the deposits and
rate of compounding are occurring.
 Present Value helps to determine the amount of money that must be
deposited today to reach a predetermined monetary amount in the
future.
 Future Value takes into account an assumed rate of growth over a
period of time and assesses the value that a current monetary amount
will have in the future.
M5.1.3 Business Analytics

Introduction
Business analytics is a field of study that assesses business data to gain
knowledge and understanding of business opportunities for change. This
process involves data identification, collection, measurement, analysis, and
interpretation. In this Learning Activity, you will be provided with an overview
of business analysis examples and an overview of key managerial economics
formulas.
Types of Business Analytics
Different types of business analyses can be conducted based on organizational decision-
making needs. For example, a business manager may ask any of the following
questions:
 Are there operational gaps and where should resources be allocated?
 What are the requirements for the next project?
 What is our budget and how can it be optimally utilized?
 What does the market research indicate about our product or service?
 How can we determine metrics to benchmark our success?
 Can a problem analysis be conducted to assess opportunities?
These are just a few questions that might be asked, and a business analyst might utilize
business intelligence analytics to dive deeper into company data to determine how a
small price increase in one product line could impact the ROI of the entire organization
or how a diversification of suppliers in the supply chain could stem new cost-saving
measures.
The following are a few examples of data concepts, types of assessments, and
applications of quantitative analyses related to business analytics. You may be more
familiar with some than others, spend some time searching the internet for each term
and make a note of the definitions.
Environment Business
Problem Analysis Strategic Planning
Scan Intelligence
Operational
Risk Analysis Market Research Regressions
Planning
Gap Analysis Estimation Tactical Planning Descriptive Data
Financial Analysis Benchmarking Budget Planning Prescriptive Data
Contingency
Technical Analysis Forecasting Inferential Data
Planning
Competitor
Use Cases Profit Planning Correlations
Analysis

Stop and Think

As you review and search the list of analysis tools above,
think about which of them would be most helpful in
proposing your product or service in your Final
Assessment. You will be asked to select, research, and
explain them and describe how they will specifically be
applied within your proposal.

Key Takeaways
 Business Analytics is a core component of effective business decision-
making, which is why it is important to understand the types of
analyses used in a business context and how the data derived from this
analysis can impact operational decisions.
M5.2.1 Decisions on Integration and
Production

Introduction
As previously mentioned, revenue is generated from the production of goods
and services at a certain price point. However, as a business leader, there are
many production related decisions that must be made.
 What quantity should be produced?
 When should it be produced?
 What supply chain processes should be considered?
 How can operations be made more efficient?
 What materials might be needed?
  What geographic constraints should be considered?
Supply Chain Operations
The types of questions posed above relate to decisions on integration and
production and, in order to make effective decisions in this area of business
operations, it’s important to have an understanding of supply chain
operations. Generally, within a product based business, there are steps in
the process that involve the procurement of materials, supplying the
materials to a manufacturer, developing the product, distributing the product
to retailers, and lastly, the consumer purchasing the item. The following is a
visual representation of this supply chain process, which begins with
consumer demand for products that require the sourcing of raw materials.

There are many factors that could optimize these supply chain operations
and the following are some concepts that relate to decision making around
Vertical and Horizontal Integration and production, products, and location.
Key Takeaways
 Supply chain operations are a critical component of business decision
making, as there is a need to understand the steps involved in
developing a product and getting it to the end user.
 The two types of integration include vertical and horizontal integration,
which each have advantages and disadvantages.
 As a manager, it’s important to plan ahead for all aspects of supply
chain management and operations, as well as risks that could be
associated with resource limitations or challenges.
M5.2.2 Decisions on Marketing

Introduction
Beyond producing a product, there are also business decisions that must be
made with respect to marketing a product or service and getting it to the end
user. This Learning Activity will outline the considerations that should be
taken into account when making decisions about marketing.
Key Takeaways
 Marketing enables a company to find opportunities to employ strategies
to sell products and services to consumers.
 Decisions around the application of marketing strategies can be
impacted by economic fluctuations and market conditions.
 It is important for businesses to evaluate marketing options, modalities,
timing, availability, and other criteria to support sales and generate a
positive ROI.
References
MAGNA. (2022). Global advertising market reaches new heights, and exceeds
pre-covid levels. Retrieved from [Link]
market-reaches-new-heights-and-exceeds-pre-covid-levels/
M5.2.3 Practice Scenario: Considering
Marketing Factors

PDF and Video’s

M5.2.4 Decisions Impacting Diverse
Industries

Introduction
There are economic factors that impact all individuals, industries,
governments, and nations; however, there are some differences in the ways
in which each industry is impacted. In this Learning Activity there will be a
high level overview of the ways in which diverse industries are influenced by
economic factors and how this might impact managerial decision making.
Economic Factors and Industry Impacts
While there are broad factors that can impact all industries, such as the Covid-19
pandemic, there are other factors that are more industry specific. In addition, there are
ways that each of these industries may also impact economics. Read the content below
to learn more about how diverse economic factors impact some of the major industries.
Stop and Think
What type of industry does your organization fall into? How would you
describe the economic factors or variables that could influence the industry?
In what way would any of these economic factors influence your decision-
making?

Key Takeaways
 Each industry may experience economic related variables in diverse
ways with an increase or decrease in growth within the sector.
Likewise, there are sectors that can lead to shifts in economic policies,
impacting individuals and businesses on a small scale, or GDP on a
large scale.
 Shifts in one industry can also lead to shifts in other industries. For
example, if there was an increase in healthcare demand and
employers were not able to maintain necessary labor quantities, this
could lead to manufacturing and distribution delays through
operational inefficiencies.

References
The World Tourism Organization [UNWTO]. (n.d.). Secretary-General’s Policy
Brief on Tourism and COVID-19. Retrieved from
[Link]
impacts
U.S. Bureau of Economic Analysis [BEA]. (2022). United States GDP from
Manufacturing. Retrieved from
[Link]
M5.3.1 Impact of Economics on Daily
Life

Introduction
Beyond a macroeconomic perspective or global economic perspective, it can
also be helpful to evaluate the ways in which economics can impact personal
decisions. As a culmination of the concepts learned in the course, this
Learning Activity will reiterate how some of the previously addressed
economic concepts could be applied to personal level decision-making. Read
the content below to learn more.
Opportunity Cost
Everyday we all make choices and in selecting one option, another choice is foregone.
This is the primary focus of the concept of opportunity cost and can be further assessed
through a decision tree analysis, which evaluates the outcome of each selection.
Time Value of Money
Since any sum of money will be worth more in the present than in the future, the
concept of Time Value of Money can be applied to personal decision making. For
example, you might ask yourself the following questions:
 Knowing that my money can buy more goods and services now, compared to in
the future due to inflation, should I currently spend?
 Should current money be saved for a future necessity?
 Should I take out a loan to purchase an item that I can gain benefits from today
and pay off over time?
 Is there money that should be invested to accumulate more value through
compound interest?
Present and Future Value
Understanding the application of present value and future value calculations can help
with determining the amount of money that should be invested today in order to reach
a set goal in the future. Likewise, if the required lump sum of money is not available in
the present, there are also calculations to determine how much of a continuous income
stream should be set aside for investment and the frequency of deposits required to
attain that same desired end goal.
Expected Value
In alignment with present and future value, individuals also engage in small scale
calculations of expected value. For instance, with each decision, an individual may
determine the probability of an event occurring and then determine the impact of that
decision. For example, an individual may try to determine if it is more effective to
refinance a current property, to purchase an additional property, rent housing versus
purchase housing, or buy a new property because interest rates are low. In these
instances, the individual must weigh out the alternative options and the short and long
term implications of each choice.

Key Takeaways
 While economics can be studied at the macro level with assessments
of GDP and aggregate consumer and supplier trends, there is value in
understanding that economics impacts all aspects of our personal lives
as well.
 The ways in which individuals make purchasing decisions, employment
decisions, and investment decisions are just a few of the ways in which
economics impacts daily life.
M5.3.2 Leveraging Economic Principles
in Your Profession

Introduction
As you have now learned throughout this competency, there are economic
implications that factor into all aspects of personal and professional business
decisions. Also, while the study of Managerial Economics aligns most closely
with microeconomic principles, there are also macroeconomic factors that
can influence decision making in the short and long-term. The content below
will share a high-level listing of key macroeconomic and microeconomic
concepts.
Key Economic Indicators
Here are some of the key economic indicators that can be used to make decision at the
Macro and Micro level:
Macroeconomics
 Nominal GDP
 Real GDP
 Money Multiplier Metric
 Quantity Theory of Money
 Unemployment Rate
 Inflation Rate
 Real Interest Rate
 Consumer Price Index
Microeconomics
 Profit Earned
 Total Revenue
 Marginal Revenue
 Average Revenue
 Total Costs
 Marginal Costs
 Average Costs
 Average Fixed Costs
 Average Variable Costs
In addition to the concepts above, the following is a summary of some managerial
economic related highlights that were noted previously within the course:
 Marginal Revenue and Marginal Cost - In order for a business to be
profitable, it’s important to keep in mind that Profit is equivalent to Revenue
minus Cost. Since the goal is to keep revenue high and costs low, the most
optimal performance will occur when marginal revenue is equal to marginal
costs.
  Risks and Returns - There are always risks related to any decision, however,
with these risks come potential returns. Thus, managers need to be aware of
existing risks and uncertainties, while also looking at innovation and
opportunities for growth.
 Opportunity Costs - With any decision that is made, another decision is
foregone. As a manager, it’s important to evaluate existing resources and make
decisions that will be most optimal for the organization, customers, stakeholders,
and associates.
 Sunk Costs - There are costs that are incurred and cannot be recouped, and as
such, managers should make wise financial decisions and consider both short
and long term implications. For instance, when purchasing new equipment versus
fixing existing equipment, all costs and risks should be considered.
 Elasticity of Demand - As prices on products and services fluctuate, consumer
demand for these products shift as well. If an organization has priced items too
high, it could lead customers to seek alternatives and move toward purchasing
from a competitor. Thus, it’s important to evaluate how price changes, consumer
purchasing trends, supply inventories and other factors impact demand.
 Differential Pricing - For some organizations, there may be more effective sales
made by providing tiered pricing options based on different levels or timing of
product or service benefits. In this way, the consumer can opt for a lower priced
basic version of the product or decide to pay a more premium price for added
benefits and features.
 Corporate Social Responsibility - Organizations should consider how decisions
that are made may impact larger environmental contexts. In this way, operations
should be revised to help support sustainability initiatives. This can be on a small
scale with reducing electrical usage during certain periods to large scale with
only utilizing supplies that are focused on reducing their carbon footprint.

Key Takeaways
 There are different strategies that can be employed to generate a
positive ROI for an organization, and understanding how economics
impacts professional decision making can help to ensure alignment
between organizational goals, resources, and profitability.
Journal Prompt
Applying Concepts
Learning Journals are opportunities for you to take notes that will assist you in
completing your Final Assessment.

As you consider the impact that economics has on business decision-making, consider
the types of analyses, analytic tools, and principles that could help you to better
understand the impact of different economic and industry-related variables.

Your Final Assessment will require that you create a proposal for the development and
launch of a new product or service with consideration of economic factors.

Refer back to the Learning Activity titled "M5.1.3. Business Analytics” and select any
five of the concepts that you would see helpful in the process of evaluating, developing,
and launching a new product or service. Research and explain these concepts and how
they will specifically be applied within your proposal.

Then, refer to the Learning Activity titled "M5.3.2. Leveraging Economic Principles in
Your Profession." Select any three concepts from this Learning Activity from the list of
managerial economic-related highlights and explain how you would use these concepts
or take them into consideration when proposing the new product or service in your Final
Assessment.

In addition, conduct some research on new product proposals and briefly explain how
you see the proposal of this product or service from your Final Assessment connecting
with managerial economic concepts that were covered throughout the competency.

Be sure to keep note of any references and in-text citations so you can properly source
all of your references in your Final Assessment.

You will use this for your Final Assessment as you will be asked to connect the
concepts you learned about in the course to your New Product Proposal. Be
sure to use the concepts you listed in this Learning Journal throughout your
Proposal in order to support your ideas.
Assignment Content
1. Question 1
A retail distribution company has decided it would have more ROI if it also had its
own manufacturing and distribution processes in-house to get the raw materials,
develop them into products, and transport them to each store location. This is an
example of which of the following concepts?
1. Competitive Integration
2. Vertical Integration
3. Logistical Integration
4. Horizontal Integration
Feedback
Vertical integration occurs when one company chooses to acquire an additional
stage of the production process, which would have typically had operations
conducted by another company. For instance, if a supplier also decided to
manufacture the products or a distributor opened a retail operation.
2. Question 2
As the manager for a large-scale steel product supplier, you have come to learn
about a new metal product line that the company will be offering. You have been
tasked with assessing how these products will make it from their location as raw
materials to the manufacturer because the new metal is heavier, which could
impact aircraft weight restrictions. What type of analysis would be most helpful in
this scenario?
1. Problem Analysis
2. Gap Analysis
3. Risk Analysis
4. Financial Analysis
Feedback
A Risk Analysis helps to identify and track potential issues for a project and
determine how these risks should be addressed through avoiding, mitigating,
transferring, or accepting the risk.
3. Question 3
As you lead the team that will be launching a new product into a local market.
Which of the following is the most critical consideration for B2B (Business-to-
Business) and B2C (Business-to-Consumer) sales?
1. Proximity
2. Environmental Risks
3. Competition
4. Advertising
Feedback
Proximity is a marketing strategy through which customers are targeted based
on their current geospatial location. In addition, this relates to the ability to
physically transfer the product from the market to the consumer.
4. Question 4
As you launch your new product line in the market, you determine that it's best
to have a different pre-sale price to create an effective buzz about the product
before launch. This is an example of which of the following business and
economic concepts?
1. Differential Pricing
2. Elasticity of Demand
3. Public Relations
4. Risks and Returns
Feedback
For some organizations, there may be more effective sales made by providing
tiered pricing options based on different levels or timing of product or service
benefits. Differential Pricing relates to selling the same product at different
prices, for different consumer groups.
5. Question 5
According to the Time Value of Money principle, money has the greatest value in
which of the following instances?
1. In a retirement account balance
2. Locked in a Certificate of Deposit account
3. Currently to expand business operations
4. After it has gained interest in the future
Feedback
According to the Time Value of Money, money has greater Present Value than
Future Value, because there are uncertainties in the future. The value of money
in the future will decrease due to factors like inflation, and a sum of money in the
present could be invested leading to stronger future earnings.