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# 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.
Mahmoud.Chaaban@gmail.com
• 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 &gt; 0 ; Project is accepted
NPV &lt; 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 “
END=======================================
Another Important Index: Earned Value Analysis
in Project Management
• 23. Thanks
QUESTIONS ?
Mahmoud S. Ahmed, B.A.Sc., EIT
Mahmoud.Chaban@gmail.com