What are possible drawbacks as
What are possible drawbacks associated with not consideringopportunity costs and time value of money when making financialdecisions?
Describe risks that you might encounter when making financialdecisions over the next few years.
Answer:
Opportunity cost is the cost of next best alternative. And thetime value of money is that the present value of the money that isreceived in future is less than that. There are various drawbacksof not considering the opportunity cost and the time value of moneywhile making financial decisions that are with out considering theopportunity cost and time value of money it does not show theactual real cost or profit from the projects . And one benefit ofopportunity cost is that it helps to judge the comparable projectsif we can not consider opportunity cost than we are not able tocompare . The opportunity cost may have a significant value eventhough it is not in monetary terms so if we ignore the time valueof money and opportunity cost we can not correctly value theproject . Time is very valuable these days if we ignore theopportunity cost and time value of money it shows that our time hasno other value.
The risks that encounter while making financial decisions areinflation risk , interest rate risks , economic risks , personalrisks etc.
Inflation risk is the risk of purchasing power risk as in futurethe value of money may decrease so the value of investment maydecrease
Interest rate risks is the risk that is associated with the riskof change in the market interest rates
Economic risks is the risk of changing macro economic conditionit includes the risk of change in technology or governmentregulations etc.
Personal risks is the risk of person related to the financialloss or increasing in expenses etc..
These are the risks that might encounter while making financialdecisions of the next few years
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