Timelines

Timelines show a list of events in the order of their occurrences; the spacing of events being dependent on the data available and how close the events happen. Time spacing could be yearly, monthly or even per minute. The timelines mostly show events that have already occurred but the same could still be used as a planning tool; for the guidance on how the planned activities should flow in the case of Bob and Carol, their events have been given a yearly spacing thus their timeline will be indicated yearly. Bob and Carol’s timeline could be as shown below (Hung, 2016).

Year 1- Bob and Carol plan to get a baby in the next four years and at this point, they think of starting a savings plan to enable them to deliver a healthy baby. Now they only have five hundred dollars to start their saving plans. Carol’s friends have also planned to have a baby shower just before the child is born. The items they plan to buy cost $1,200 in the current time.

Year 2- Uncle Ted adds one thousand dollars to Bob and Carol’s savings plan. He gave them that as a present for their expected baby.

Year 3 – Pre-natal care preparation begins (since it is done twelve months before delivery of the baby) and it costs two thousand dollars

Year 4 – Carol’s friends carry out the baby shower as earlier planned and the purchase of a crib, baby carriers, and other miscellaneous items is also done. This same year Bob and Carol welcome their newborn into the world and can deliver a healthy baby in the hospital because of their adequate savings.

Question 2

The prices mentioned in the excerpt are current prices, but in four years’ time, they will not be the same. They will have increased due to the time value of money. Time value of money concept seeks to illustrate the fact that the amount of money/ the value of money now is worth much more when received later. Money has an earning capacity and thus cannot remain the same after the lapse of time. In the case of Bob and Carol who plan to have a baby in four years, the cost of all they intend to do will be much higher. Thus, they cannot save any money basing on the current rates. They might have to save much more in order to cater for the earning capacity of that money. The method used in this case is annual compounding at the given rate since the amounts increase every single year (Hamadani & Khorshidi,2013).

The price of the baby shower items will be increased by ten percent every year. We will compound 1,200 for four years to get the amount needed for the purchase of baby shower items. The formula used will be A = P (1 + r/n) ^nt. 1200(1 + 0.1/12) ^12*4. The simpler version gives (1200*1.4689) which equals $ 1,784.28. The items will be purchased at a higher price after the lapse of four years.

The initial hospital of $6,500 will be compounded annually for four years to get the final figure. The cost of prenatal care preparation is incurred in the third year and thus will only be compounded annually for one year.

The formula for compounding annuity is given by A = P (1 + r/n) ^nt. For the hospital cost, the amount at four years will be 6500(1 + 0.06/12) ^12*4. When simplified, it becomes (6500*1.270489) = $ 8,258.18. After four years, the cost of delivering a healthy baby will be $ 8,258.18. The cost of prenatal care in the fourth year will be calculated with the same formula as 2000(1 + 0.06/12) ^12*1. When further simplified the equation becomes (2000*1.06168) = $2123.36. Within one year the price will have increased by $123.36

By the three amounts are added, the sum that Bob and Carol require for the delivery of a healthy baby can be obtained; it is $(1784.28+8258.18+2123.36) which equals $ 12,165.82.

Question 3

In the previous calculations, the amount of money needed at the end of four years was established. As a result, the sum of money needed to be saved every year can also be calculated; this can be done by dividing the full amount expected by the number of years, which is four; (12,165.82/4) = $3,041.45. Each year, Bob and Carol need a savings of $ 3,041.45 in order to achieve their goal after 4 years.

All the above calculations show that money indeed has an earning capacity with time. The amount now is worth much more in the future. At the end of year four, Bob and Carol can execute their plans as per their timelines. Time value of money caters for any increases in the amount of money needed in the future. The prices could also increase due to the state of the economy at that time and inflation. Time value of money concepts allows one to save wisely and avoid shortages that might occur (Foley, 2013).

References

Foley, D. (2013). Money, accumulation and crisis. Taylor & Francis.

Hamadani, A. Z., & Khorshidi, H. A. (2013). System reliability optimization using time value of money. The International Journal of Advanced Manufacturing Technology, 66(1-4), 97-106.

Hung, K. C. (2016). Continuous review inventory models under time value of money and crashable lead time consideration. Yugoslav Journal of Operations Research, 21(2).