Time Value Of Money

PROJECT MANAGEMENTMINI LECTURE

TIME VALUE OF MONEYANDPRESENT WORTH ANALYSIS

Mahmoud S. Ahmed, B.A.Sc., E.I.T.

Mahmoud.Chaaban@gmail.com

www.linkedin.com/in/mahmoudchaaban

INTRODUCTION

It is recognized that a dollar today is worth more than a dollar one or more years from now, because of the interest (profit) it can earn.

Whenever capital (funds) is required in engineering and other business projects and ventures, it is essential that proper consideration be given to its cost. (i.e, time value).

SIMPLE INTEREST

Total interest is linearly proportional to the initial principal amount. It is said to be simple interest.

I = (P) (N) (i) Where P = principal amount. (N) = number of interest periods. (i) = interest rate per interest period.

I = $1000 x 3 x 0.10 = $300Total amount = (P) + (I) = $1,300

COMPOUND INTEREST

The Interest charges for any interest period is based on the remaining principal amount plus any accumulated interest charges up to the beginning of that period. Is said to be compound.

Period Amount Owed

(1)

Interest Amount for Period

(2) = (1) x 10%

Amount Owed at End of Period(3) = (1) + (2)

1 $1,000 $100 $1,100

2 $1,100 $110 $1,210

3 $1,210 $121 $1,331

ECONOMICAL PROJECT SELECTION

Major Five area for decision taker

- 1- Minimum Attractive Rate of Return (MARR)- 2- Net Present Value (NPV)- 3- Annual Worth- 4- Internal Rate of Return (IRR)- 5- The Payback (Payout) Period

PRESENT WORTHNOTATION AND CASH-FLOW DIAGRAM

(i) = effective interest rate per interest periodN = number of compounding periodsP = Present sum of moneyF = Future sum of moneyA = end-of-period cash flows

ECONOMIC PROJECT SELECTION

2- Net Present ValueNPV = PW of cash inflows – PW of cash outflowsNPV = Revenue – ExpensesNPV > 0 ; Project is acceptedNPV < 0 ; Project is rejectedNPV = 0 ; It is a risky project

3- Annual WorthAW (i%) = Revenue – Expenses – CR (i%)Where CR is capital recoveryCR (i%) = I (A/P, i%, N) – S (A/F, i%, N)Where I = Initial Investment

S = Salvage value at end of study periodN = project study period

CONTINUED

4- Internal Rate of Return (IRR)By using PW formulation, we find i/ % (IRR)PW = ΣR (P/F, i/ %,K) – ΣE (P/F, i/ %, K) = 0The point of PW = 0 defines i/%if i/ % ≥ MARR, the project is acceptable,

otherwise notIRR is important to the lenders.

5- The Payback (Payout) Period Σ (R – E) (P/F, i%, K) – I ≥ 0Where i% is the MARR, I is the capital investment at k= 0

BEFORE & AFTER

GENERAL PROJECT LIFE CYCLE COST & ANALYSIS

TVM BASIC TOPICS Application of Money-Time Relationships Benefit-Cost Comparing Alternatives Depreciation and Income Taxes

Cost Estimation Techniques Price Change and Exchange Rates Replacement Analysis Dealing with Uncertainty

“Our Course Project “

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Another Important Index: Earned Value Analysis

in Project Management

THANKS

QUESTIONS ?

Mahmoud S. Ahmed, B.A.Sc., EIT

Mahmoud.Chaban@gmail.com

www.linkedin.com/in/mahmoudchaaban