Answer:
A) The effect of not taking the time value of assets into consideration during the threat management process is that one's assessments might end up being inaccurate. This inaccuracy arises from not taking into account real-world phenomena such as inflation and interest that have a significant impact on the value of money over time.
) The net present value of a loss control investment represents the difference between the initial investment and all projected cash flow for a venture. It helps the owners of an organization determine whether or not a proposed investment is worth pursuing. If the value is positive, the proposed venture will be pursued. Inversely, if the value is negative, the proposed venture will be vacated.
Explanation: Ignoring the time value of money in risk management decisions may lead to wrong decisions or, at least, less than optimal decisions.
a. The effect of ignoring the time value of money when making an investment decision is the danger of arriving at an unprofitable business decision.
The time value of money, as a financial management concept, ensures that cash flows are discounted to their present values because the value of money today is not the same in the future.
Inflation takes its toll on the value of money. The purchasing power of a dollar today is worth more than the same dollar in a year.
b) The net present value of investment ensures that the stockholders are not put at risk of investment loss because of the time value of money.
The net present value (NPV) is computed by discounting the cash inflows and outflows, and the difference between these cash flows is the NPV.
Thus, using the net present value of an investment to base a decision removes the timing differences on the worth of money today and the same amount of money in a year and the financial loss that could occur with the receipt of cash in the future instead of in the current period.
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