Monetary Value: Definition, Examples, and How it Works.

Monetary value
Monetary value

Monetary value is the price of a product or cost of service. Let’s say you own a house and want to sell it, you have to determine how much it’s worth in cash. That is what monetary value is all about.

Another example of monetary value is the cost of service that someone renders to you. If you’re a business owner or stakeholder, you need to understand how to determine the cash worth of goods and services. This is because it can help you during risk-benefit analysis and much more.

Let’s explore how monetary value works and how to calculate and determine it. But first, a quick definition.

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Monetary Value Definition: What is Monetary Value?

Monetary value means the price value that a business, market, or person places on goods or services. It is typically understood as the cash worth of something. In fact, most products and services in today’s economy are priced based on their monetary value.

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How to Calculate Monetary value?

You can calculate monetary value based on benefits, uses, input cost, and durability of goods and services. The formula for calculating Monetary value is called Expected Monetary Value (EMV).

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Expected Monetary Value (EMV): The Monetary Value Calculator

This calculation depends on measuring the probability and impact of each risk. Probability refers to the possibility of the occurrence of an event or a condition.

So, you multiply the probability with the impact of the identified risk to get the EMV. 

 EMV = Outcome Possibility x Identified risk/Impact

The probability is mostly a percentage or fraction, while the impact is the positive or negative monetary value.

  • Determine the probability (P) an outcome will occur.
  • Determine the monetary value or impact (I) of the outcome.
  • Multiply P x I to calculate the EMV.

Example:

A machine costs $90,000 and has a 60% chance of working. If it works, your project will net $18,000.

  1. If the machine works…
    • Positive EMV = 60% x $18,000 = $10,800
  2. On the contrast, if the machine fails…
    • Negative EMV = 40% x -$90,000 = -$-860
  3. Overall EMV = $10,800–$860 = $9,940

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What are the Pros and Cons of Expected Monetary Value (EMV) Formula?

Pros:

  • EMV helps project planners calculate the chances reserved to manage costs and risks.
  • The EMV also helps you in deciding between different choices by providing monetary values to the options.
  • It is an easy way to evaluate risks.
  • This calculation also provides the average outcome of all identified risks.
  • It is a straightforward formula.
  • The EMV value gives you a simple answer about which course of action to take.

Cons:

  • This technique is limited to large projects and not recommended for small and medium-sized projects.
  • It’s subjective and can have biased results.
  • Identifying the positive risks (opportunities) is just as important as the negative risks (threats) to arrive at the right outcome for the EMV.
  • Enable risks can be difficult and time-consuming.

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How to Determine Monetary Value?

Monetary value is a debatable subject. However, it includes an assessment of the cost, efficiency, and effectiveness. However, the following are six principal methods that can evaluate or determine the value of money:

  1. Cost-Effectiveness Analysis (CE Analysis) 
  2. Cost-Utility Analysis (CU principal methods) 
  3. Cost-Benefit Analysis
  4. Social Return on Investment (SROI)Analysis
  5. Rank correlation of cost vs. impact
  6. Basic Efficiency Resource Analysis (BER analysis)

1. Cost-Effectiveness Analysis (CE Analysis)

In this evaluation, we use two or more options. This is based on the relative costs and outcomes (effects). Furthermore, it can be used when comparing options that aim to achieve the same goal. It cannot, however, compare things with different goals.

Cost-Utility Analysis (CU Analysis)

CU analysis is a type of evaluation that takes two or more options and compares their costs to their value. This analysis can cause many likely outcomes. Although, results are often difficult to reproduce among different things. This is because of some conflicting methods used.

Cost-Benefit Analysis

Cost-Benefit analysis is an evaluation of options by identifying the cost and benefits of each option in money terms for time. You can also use it when most benefits can convert to monetary values. However, this method can identify if a course of action is useful in a complete sense and whether the costs are more than the benefits.

Social Return on Investment (SROI)Analysis

The SROI analysis is concerned with measuring social, environmental, and economic costs and benefits. We can also use SROI when comparing programs with different goals or in different sectors.

Rank correlation of cost vs. impact

Rank correlation of cost vs. impact is a method that allows for the relative measurement of value for money across a portfolio of industries. However, this method will help determine a comparison between options for various purposes. It is also useful for multi-unit programs.

Basic Efficiency Resource Analysis (BER analysis)

BER analysis is for evaluating a complex program. However, we do this by comparing the impact on resources. It will offer a relative view on performance. So, the units analyzed are judged by comparing them to other peer units. It also applies to other data and is never the only analytical approach. Finally, this approach simplifies complex data.

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What has no Monetary Value?

A monetary asset has a price value. On the other hand, a non-monetary asset is an asset that a company owns that does not have a definite dollar value. This also means that it cannot be easily converted to cash or its equivalent.

Nonetheless, a non-monetary asset can be converted to cash or its equivalent only for a precise or fixed amount of money.

Is the U.S Dollar a Store of Value?

Generally, money is considered a good store of value because of its purchasing power. However, when compared to other global currencies, the U.S Dollar has gained in value over the last six years against JPY, EUR, CHF, and GBP. This means that U.S Dollar has the highest store of value among the world’s greatest currencies.

What is the Difference Between Monetary Value and Sentimental Value?

A monetary value is a price placed on goods and services while a sentimental value is associated with happy times in life derived from using a particular commodity or service that triggers good memories.

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What is the Monetary Value of an Artwork?

In the late 1960s, French philosopher Jean-Joseph Goux whose philosophical work gained shape in the context of French structuralism sees the monetary value of an artwork as an expression of various art historical circumstances, the artist’s biography, the art dealer, collectors, and the influence of the museums. He further analyzed the price of an artwork based on its aesthetic value.

Why is Monetary Value Important?

Monetary value is important because, in the modern economy, almost everything is measured by its monetary value. In fact, money is the bedrock for the monetary valuation of products and services. Most importantly, this also allows the accumulation and storage of wealth and modern market transactions.

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What are the Examples of Monetary Value?

Examples of monetary value are Gold, Bitcoin, Silver, (Commodity), and NFT. Monetary value is attached to goods and services. However, it is also a set of tools that a nation’s central bank uses to promote sustainable economic growth.

Below are two examples of monetary values:

Gold, Bitcoin, Silver (Commodity)

Central banks use gold as reserve assets. Thus, this makes investors see it as a non-risky choice. It is a universal monetary asset, for it is a prime. However, the price of gold varies over time because of inflation or an economic crisis.

Gold is also precious for its qualities, like long-lasting, solid, and shiny, which verify its worth.

Bitcoin price fluctuates. However, Bitcoin ETFs (Exchange-traded funds) allow investors to gain exposure to the most popular cryptocurrency without actually owning it.

Non-Fungible Token (NFT)

NFT takes the form of digital content, and documentation of ownership stored on the blockchain.

So, we call this a digital certificate of ownership of assets since it authenticates any digital piece of work, like artwork, games, GIFs, tweets, images, and code. However, people can convert their digital work into an NFT. 

In 2021, A16z was one of the largest VC investors in the NFT market for startups. More so, A16z investments in the NFT market include a $150 million investment in Mythical Games, a play-to-earn gaming platform, in a Series C funding round valued at $1.25 billion.

Conclusion

Monetary Value is the value in the market’s currency of products and services. It is the money placed on items by a company that determines its profit or loss. Also, we associate the monetary worth of any product or service with several factors like government intervention, supply, and demand.

EMV techniques, however, are best for achieving risk management in a business or an organization. However, it is suitable for large-scale businesses rather than small or medium ones.

How do you determine monetary value?

  1. Cost-Effectiveness Analysis (CE Analysis).
  2. Cost-Utility Analysis (CU Analysis).
  3. Cost-Benefit Analysis.
  4. Social Return on Investment (SROI).
  5. Rank correlation of cost vs. impact.
  6. Basic Efficiency Resource Analysis (BER analysis).

Why monetary value is important?

Money allows for the monetary valuation of goods and services, which allows for the storage and accumulation of wealth and modern market transactions.

Does monetary mean money?

Monetary is related to money or to the mechanisms by which they supply money.

What does monetary value mean in law?

Monetary value means a medium of exchange, whether redeemable in money, including as stored value, payment instrument, or credit to the account, and shall also include gold coins and gold bullion.

How is economic value created?

Economic value is created when the return on the firm’s economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to GAAP accounting.

Reference

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