Critical Thinking: Financial Ratios and Time Value of Money 
Complete the following problems:

Problem 4-1: Ratio analysis
Problem 4-2: Market value ratios
Problem 4-3: Future value calculations
Problem 4-4: Present value calculations
Problem 4-5: Compound annuity calculations
Problem 4-6: Present value of annuity calculations
Problem 4-7: Compound interest at non-annual rates

You can access the problem details by clicking on Ratio Analysis and Time Value of Money
Module 4 Critical Thinking Assignment
Ratio Analysis and Time Value of Money
Problem 4-1
RATIO ANALYSIS (Chapter 4)
The Balance Sheet and the Income Statement for XYZ Manufacturing Corporation are as
follows:
DATA (All amounts in SAR unless otherwise indicated, and all sales are on credit.)
Balance Sheet:
Cash
400,000
Acct/Rec
725,000
Inventories
650,000
Current assets
1,775,000
Net fixed assets
690,000
Total assets
2,465,000
Accts/Pay
Accrued expenses
Short-term N/P
Current liabilities
Long-term debt
Owner’s equity
Total liabilities and owners’ equity
265,000
310,000
80,000
655,000
950,000
860,000
2,465,000
Income Statement:
Net sales
COGS
Gross profit
Operating expenses
Net operating income
Interest expense
EBT
Income taxes
Net income
9,550,000
4,866,000
4,684,000
2,984,000
1,700,000
45,000
1,655,000
662,000
993,000
Calculate the following ratios:
Current ratio =
Acid test ratio =
Debt ratio =
Operating profit margin =
Operating return on assets =
Return on equity =
Times interest earned =
Average collection period =
Inventory turnover =
Fixed asset turnover =
Total asset turnover =
Problem 4-2
MARKET-VALUE RATIOS (Chapter 4)
Jeddah Industries has a price earning ratio of 11X.
a. If Jeddah’s earnings per share are SAR 42.00, what is the price per share of Jeddah’s stock?
b. Using the price per share you calculated in part a, determine the price / book ratio if
Jeddah’s equity-book value is 17.40.
Solution
a. Price per share
b. Price/book ratio
Problem 4-3
FUTURE VALUE CALCULATIONS (Chapter 5)
To what amount will the following investments accumulate?
Annual
Amount Invested (SAR)
Interest
Years
80,000
5%
5
60,000
4%
12
35,500
12%
4
97,000
7%
15
Problem 4-4
PRESENT VALUE CALCULATIONS (Chapter 5)
What is the present value of the following future amounts?
Annual
Future Amount (SAR)
Interest
Years
900,000
5%
5
478,000
4%
12
279,000
12%
4
440,000
7%
15
Problem 4-5
COMPOUND ANNUITY CALCULATIONS (Chapter 5)
What is the accumulated future sum of each of the following Ordinary annuities?
Annual
Present Amount (SAR)
Interest
Years
20,000
5%
5
42,000
4%
12
8,000
12%
4
19,500
7%
15
Problem 4-6
PRESENT VALUE OF ANNUITY CALCULATIONS (Chapter 5)
What is the present value of each of the following Ordinary annuities?
Annual
Present Amount (SAR)
Interest
Years
20,000
12%
5
42,000
5%
12
8,000
4%
4
19,500
2%
5
Problem 4-7
COMPOUND INTEREST AT NON-ANNUAL RATES (Chapter 5)
Given the annual interest rates below, and the compounding period indicated,
calculate the FUTURE VALUE for each item.
Annual
Compounding
Present Amount (SAR)
Interest
Years
Period
20,000
6%
5
Semi-annually
42,000
4%
12
Quarterly
8,000
12%
4
Monthly
Module 4: Time Value of Money
1. The Time Value of Money
An important concept for investing, and one of the foundational principles of finance,
is the time value of money. This basic concept is that as time goes forward, the
value or purchasing power of money changes. In other words, a dollar received
today has more purchasing power than the same dollar received 10 years from now.
In the same sense, a dollar received 10 years ago had more purchasing power than
the same dollar received today (Keown, Martin, & Petty, 2017). Consider this:
Table 1:
Comparative costs from 1960–2010 in the United States of America
Note: Adapted from The People History (2015), The U.S. Census Bureau (2015), and
Macrotrends (2015).
This table is presented in nominal values. That means the values have not been
adjusted for inflation. As you review the information in the table, notice how the
values increase from one decade to the next in most of the columns. The exceptions
are the inflation rate and barrel of crude oil. The inflation rate reflects part of the
increases that are noted. Crude oil prices are only slightly affected by inflation; the
primary fluctuations relate to the supply and demand for this product. The next
section will review the effects inflation has on the value of money.
Let’s consider some examples using the data in Table 1. Ignoring age for a minute,
let’s say that you decided in 1960 to invest $2,600 in a savings account instead of
buying a new car. Over the next 50 years, you forgot about the investment, and the
amount continued to grow with interest earned on your investment. In 2010, you
remembered this investment and decided to withdraw the money. To your surprise
and pleasure, your original $2,600 had grown to $27,950. By using the formula
presented in our textbook, we can analyze the change in values and determine the
average interest rate we earned on our 1960 investment. The future value (FV) of
an investment can be calculated like this:
Example 1:
FV = PV × (1 + r)n
•
In our example:
o FV = future value = $27,950
o PV = present value = $2,600
o r = interest rate
o n = number of periods = 50
? $27,950 = $2,600 × (1 + r)50
? r = 4.86%
Example 2:
Now let’s look at this from a different perspective. If you were approached to make
an investment that paid you $27,950 at the end of 50 years and you determined
that you wanted to earn 4.86% annual interest rate, how much should you invest?
The present value (PV) of money to be received in the future can be determined as
follows:
PV = FV ×
1 (1 + r)n
PV = $27,950.00 ×
1 (1 + 4.86%)50
PV = $2,600
These are simple examples with only one payment received at the end of the period.
Using the expanded formulas in our text, you can also calculate future values,
present values, interest rates, etc. using different payment streams and interest
rates. This is very valuable when reviewing investment and purchase decisions.
The financial calculations can be completed very easily using a financial
calculator. Watch the following video, which contains an illustration of how to
perform time value of money calculations with the Texas Instruments Business
Analyst II calculator:

This video contains a demonstration on the use of the Texas Instruments Business Analyst
II calculator to calculate the time value of money.
Now that you have a better understanding of Time Value of Money using a financial
calculator, review the video Excel Basic Time Value of Money to see how this can be done
using an Excel spreadsheet:

The presenter expands on the use of Excel to calculate Time Value of Money.
Now that you have seen how the calculation can be done, try your hand at using a
calculator or an Excel spreadsheet to calculate the time value of money.
2. How Inflation Affects the Value of Money
Inflation is a major factor when considering historical costs, and in projecting future values.
In the previous section, we considered some historical costs for the 50-year period from
1960 through 2010. The table presented in the first section reflected nominal values, which
were the reflected dollar costs in the years indicated. Table 2 adjusts the cost of a new
home for inflation, and estimates the nominal costs for the same decade.
Note: Table data derived from U.S. Census Bureau (2015) statistics, with the U.S.
Inflation Calculator (2015) used to project numbers in inflation columns. These
numbers were adjusted for each decade.
Table 2 reflects the effects of inflation on the value of money. Nominal costs reflect
the effects of supply and demand during a specific decade as well as the health of
the economy during specific times. The last column indicates the cost increase minus
inflation for the decade. The last column also approximates the real dollar increase
in the cost of a new home.
Watch the following video, which contains an explanation of how investing in
companies that have pricing power is a way to defend against inflation:
https://www.youtube.com/watch?v=KOtL1Vrwi7k&feature=emb_logo
Today’s No Dumb Question explained: What does inflation mean to you as an investor?
What is inflation, exactly…and what’s it to you?
References
Keown, A. J., Martin, J. D., & Petty, J. W. (2017). Foundations of finance: The logic and
practice of financial management (9th ed.). Upper Saddle River, NJ: Prentice Hall.
Macrotrends. (2015). West Texas intermediate crude oil prices. Retrieved from
http://www.macrotrends.net/1369/crude-oil-price-history-chart
The People History. (2015). Money and inflation. Retrieved from
http://www.thepeoplehistory.com/1960s.html
U.S. Census Bureau. (2015). Median and average sales prices of new homes sold in United
States. Retrieved from http://www.census.gov/const/uspriceann.pdf
U.S. Inflation Calculator. (2015). U.S. inflation calculator. Retrieved from
http://www.usinflationcalculator.com/
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Module 4: Networks, Collaborative Technology, and the
Internet of Things
1. Network Fundamentals Applied to Business
Networks
A network is useful for businesses in that it allows users to easily share data. A user
can be in a remote office on one side of the globe and access data that is on the
other side of the globe. This is brought about by data communications, which uses
software and hardware to exchange data between a sender and receiver (Bidgoli,
2018). A business manager must understand networks and related technology in
order to make effective decisions on the technologies in which the organization will
invest. Let us start with some of the basics.
There are many types of networks; here are two of the most common:
•
•
Local Area Network (LAN—)A network in which computers and shared devices
are within close proximity, such as the same building or campus.
Wide Area Network (WAN—)A network in which computers and shared
devices are geographically dispersed, such as in a different city or country.
A network topology is the “lay of the LAN.”
Click on the following to learn about some common topologies:
Bus:
The bus topology employs one cable with all of the computers (called nodes) connected by a
smaller coaxial plug. The upside of this topology is that it is relatively cheap and easy to
implement and does not require much cabling. The downside is that if the single cable
breaks, then the whole network goes down. As more devices are connected, the speed of
the network tends to slow down.
Ring:
The ring topology is a cable going from each computer to the other. The advantage
of this topology is that data flows in one direction, which allows for a rapid transfer
of data. The downside is that if the cable or a connected device fails, the entire
network fails. It is more difficult to implement than a bus network, and it is harder to
troubleshoot when there are problems.
Star:
The star is the most commonly used topology. In a star, there is a single cable going from
each connected device to a center device called a hub (or switch). Reliability is a major
advantage of this topology—if a cable or device fails, the rest of the network is not
impacted. It is also easier to troubleshoot than the other topologies. Finally, it is scalable
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and can also include wireless connections in the configuration. The disadvantage to this
topology is that if the hub or switch fails, the entire network will go down. It is also more
expensive to implement, requiring more cable and hardware.
Decisions on topologies, then, can focus on different aspects such as cost, ease of
implementation, reliability, and speed.
Business managers must analyze the various needs of the business to determine
which topology makes the most sense. They must do the same thing with regard to
which network technologies and network components they should invest in. Turban,
Pollard, and Wood (2018) noted that such investment decisions can impact multiple
areas of the business, including security, productivity, and user experiences.
2. Protocols, Interfaces, and Network Capabilities
A key part of the data exchange in any network is the use of a protocol. Protocols
are “rules that govern data communication, including error detection, message
length, and transmission speed” (Bidgoli, 2018, p. 121). Think of data
communication as a speaking language. Just as there are rules to follow when
speaking a language, there are also rules associated with network communication.
Otherwise, communication between the sender and receiver would never occur.
The most common protocol in use today is the Internet Protocol, better known
as IP. An IP address is a unique number (the “address”) for each device
communicating with a network or the Internet. IP is combined with the Transmission
Control Protocol (TCP) to form TCP/IP. Every device connected to the internet uses
TCP/IP, which allows for global communication and data sharing. TCP/IP is actually a
suite of protocols. Some common ones you may have heard of are FTP, HTTP, or
ICMP (for the PING command). The PING command is used to troubleshoot
networks for connectivity and is a commonly used term in IT.
On a broad level, the network components can be divided into software and
hardware. As we have learned, we need both software and hardware in order for a
computer system to work. In terms of network hardware, the main elements are
routers, switches, and hubs.
A hub is a hardware device to which all of the computer devices (anything with an IP
address) are interconnected. It is the centerpiece in the star topology. Just as the
hubcap on a car tire is the center of a tire, a network hub is the center of the
network.
A switch acts like a hub but is “smart.” When communicating with a hub, a sender
will “ask” all devices if this is the destination address it needs. If there are ten
devices connected, potentially all ten devices will be asked, which is inefficient. A
switch uses a lookup table (much like an index in a database) to locate the
destination device quickly. The business impact is that a switch is more cost effective
than a hub in the long-run, as it increases network throughput—in other words, it
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increases the rate at which communications are successfully delivered to the
receiver.
A router is a hardware device that uses routing protocols to determine the best way
(or route) for the sender’s data to reach the destination. Common routing protocols
are routing information protocol (RIP) and open shortest path first (OSPF). From a
business perspective, it is important to understand protocol efficiency. For example,
OSPF is more efficient for larger networks while RIP is more efficient for smaller
ones.
When you connect to the internet, not only are you using the Internet Protocol (IP),
you are also using another underlying hardware protocol, called Ethernet. IP needs
Ethernet to work. If you have ever heard of a “hardware address” or “MAC address”,
then Ethernet is in use. Ethernet is used in both wired and wireless networks.
3. Mobile Networks
In order for devices to communicate, there must be something to carry the signal. Wired
technologies use an Ethernet cable to connect to one another. In the case of the star
topology, an Ethernet cable would go from the computer to the hub or switch. Then, the
hub or switch would connect to a router. In a wired technology, the connection between the
computer and the hub/switch is dedicated.
Although connection via a wired network is generally fast, it is not mobile. Wireless
or wireless fidelity (Wi-Fi for short) networks allow for connections from almost
anywhere to an access point. If connecting to a star topology network, for example,
an antenna would be used to actually send the signal through the air rather than
over a cable.
Companies are finding that mobility can greatly increase the efficiency and
productivity of their employees (Elliot, Scornavacca, & Barnes, 2015). Smartphones,
for example, allow employees to connect and communicate at any time. Wireless
computers allow them to work when they are out of the office, whether on the road
or at home. This has also allowed many employees to work remotely all or part of
the time.
Advancements in technology such as Bluetooth, GPS, 4G, and 5G have helped propel
mobilization globally (Editor, n.d.). 5G technology implementation is increasing
globally and promises to “dramatically increase the speed at which data is
transferred across the network” (Turban et al., 2018, p. 110).
The following video will help you better understand the up-and-coming 5G
technology.

4
The next generation of wireless networks—5G—promises to deliver faster data speed and
more reliable service. This video shows the results from a survey given to investors and
analysts on the scale of 5G and IoT opportunity.
5G networks will help manage the increasing demands on wireless networks.
There are downsides to wireless that must also be considered. Costs, technical
issues, and security risks have been factors restricting implementation (Elliot et al.,
2015). While wireless fosters mobility, the connection is generally slower since the
bandwidth is shared. In addition, data traveling through the air can be vulnerable to
interception mid-transmission. There is significant risk when connecting to free,
public Wi-Fi. Businesses should have rules in place for employees using such
connections.
4. Collaborative Technologies and the Internet of
Things (IoT)
The original Internet (or Web 1.0) is evolving. With Web 2.0, the trend is toward a
more interactive, collaborative experience for the user (Bidgoli, 2018). We see that
with the rise in popularity of social media sites like Facebook and Twitter. Web 3.0 is
the latest trend, with users and computers interacting with the Internet
using artificial intelligence (AI). Instead of users having to search through web sites,
for example, AI software will help with this tedious task (Bidgoli, 2018). Note that
these different technologies use the same Internet, with some web servers and
applications using Web 1.0 technologies, others using Web 2.0 technologies, and still
others using Web 3.0 technologies.
View the following video on collaboration tools and the emerging technology of AI:

This video analyzes the benefits of adding AI to collaboration tools by specifically looking at
a specific platform called RUUM by SAP.
Let us explore some Web 2.0 collaborative technologies and their possible business
uses; click on each:
Blog:
The term blog is short for binary log or Weblog (Bidgoli, 2018). A blog is a journal of one’s
thoughts and opinions. Companies use blogs as a way of engaging with customers, creating
communities for them, and encouraging conversation around a company and its products or
services (Dobele, Steel, & Cooper, 2015). They can also be used to improve search engine
results and drive more customers to a company’s web site.
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Wiki:
The term wiki means fast in Hawaiian. A wiki is a web page where the content can
be created and modified by many users—quickly. They provide an easy-to-use tool
for creating, sharing, and integrating information within an organization.
Crowdsourcing:
Crowdsourcing is a collaboration technique that organizations can use to collaborate with
online communities to solve problems, using the collective creativity, actions, and ideas of
large groups (Vreede, Antunes, Vassileva, Gerosa, & Wu, 2016). Some businesses involve
customers to gain their insight and use them as co-creators as a way to address “fastchanging user needs, shorter product life cycles, and an increasingly competitive climate”
(Kohler, 2015, p. 65). Others might invite specific groups to address a business need. For
example, a mortgage lender invited ten technology firms to compete in a crowdsource
challenge to create a new mobile loan operating system for its loan officers (PR Newswire,
2018).
Companies can adopt one or more of these technologies to better compete in the
on-demand economy. For example, a company could use social media and blogs to
connect with consumers and conduct surveys, and a wiki to assist in a collaborative
project involving geographically dispersed employees.
As discussed in an earlier module, the Internet of Everything (IoE) is a development
effort in which everyone is interconnected via various devices using different
connection types. The Internet of Things (IoT) is a subset of IoE in which physical
objects (the “things”) are connected via the Internet. There are a multitude of
business uses for IoE and IoT. IoT devices can collect valuable data to help
businesses improve business processes. These could be smart sensors alerting
municipal officials to leaking pipes in a city’s water system, for example, helping the
city to reduce water loss (Bidgoli, 2018). IoT devices can also improve supply chain
management, automating processes and providing valuable data to decision-makers
as a company’s products move through the supply chain to the customers.
View the following video on IoT and Industrial IoT:

This video explores the world of IoT with some time spent comparing and contrasting IoT to
IIoT.
References
Bidgoli, H. (2018). MIS8. Boston, MA: Cengage Learning Inc.
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Dobele, A., Steel, M., & Cooper, T. (2015). Sailing the seven C ‘s of blog marketing:
Understanding social media and business impact. Marketing Intelligence &
Planning, 33(7), 1087-1102.
Editor. (n.d.). How wireless technology is benefiting industry? Retrieved from

Elliott, L., Scornavacca, E., & Barnes, S. J. (2015). Wireless technologies in New Zealand
businesses: A longitudinal assessment. The Journal of Computer Information
Systems, 55(3), 65-71.
Kohler, T. (2015). Crowdsourcing-based business models: How to create and capture
value. California Management Review, 57(4), 63-84.
Turban, E., Pollard, C., & Wood, G. (2018). Information technology for management: On-
demand strategies for performance, growth, and sustainability (11th ed.). Hoboken,
NJ: John Wiley & Sons, Inc.
Vreede, G., Antunes, P., Vassileva, J., Gerosa, M. A., & Wu, K. (2016). Collaboration
technology in teams and organizations: Introduction to the special issue. Information
Systems Frontiers, 18(1), 1-6.

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