Time Value Of Money

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Engineering Economy title named TVM; Time-Value-Of-Money, It is important for any project selection

Engineering Economy title named TVM; Time-Value-Of-Money, It is important for any project selection

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  • 1. Project ManagementMini LectureTime Value of MoneyandPresent Worth Analysis
    Mahmoud S. Ahmed, B.A.Sc., E.I.T.
  • 2. 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).
  • 3. 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 = $300
    Total amount = (P) + (I) = $1,300
  • 4. 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.
  • 5. Economical Project Selection
    Major Five area for decision taker
    • 1- Minimum Attractive Rate of Return (MARR)
    • 6. 2- Net Present Value (NPV)
    • 7. 3- Annual Worth
    • 8. 4- Internal Rate of Return (IRR)
    • 9. 5- The Payback (Payout) Period
  • Present worthNotation and Cash-Flow Diagram
    (i) = effective interest rate per interest period
    N = number of compounding periods
    P = Present sum of money
    F = Future sum of money
    A = end-of-period cash flows
  • 10.
  • 11. Economic Project Selection
    2- Net Present Value
    NPV = PW of cash inflows – PW of cash outflows
    NPV = Revenue – Expenses
    NPV > 0 ; Project is accepted
    NPV < 0 ; Project is rejected
    NPV = 0 ; It is a risky project
    3- Annual Worth
    AW (i%) = Revenue – Expenses – CR (i%)
    Where CR is capital recovery
    CR (i%) = I (A/P, i%, N) – S (A/F, i%, N)
    Where I = Initial Investment
    S = Salvage value at end of study period
    N = project study period
  • 12. 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) = 0
    The point of PW = 0 defines i/%
    if i/ % ≥ MARR, the project is acceptable,
    otherwise not
    IRR is important to the lenders.
    5- The Payback (Payout) Period
    Σ (R – E) (P/F, i%, K) – I ≥ 0
    Where i% is the MARR, I is the capital investment at k= 0
  • 13. Before & After
  • 14. General Project Life Cycle cost & Analysis
  • 15. TVM Basic Topics
    • Application of Money-Time Relationships
    • 16. Benefit-Cost
    • 17. Comparing Alternatives
    • 18. Depreciation and Income Taxes
    • 19. Cost Estimation Techniques
    • 20. Price Change and Exchange Rates
    • 21. Replacement Analysis
    • 22. Dealing with Uncertainty
    “Our Course Project “
    Another Important Index: Earned Value Analysis
    in Project Management
  • 23. Thanks
    Mahmoud S. Ahmed, B.A.Sc., EIT