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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

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### Transcript of "Time Value Of Money"

1. 1. Project ManagementMini LectureTime Value of MoneyandPresent Worth Analysis<br />Mahmoud S. Ahmed, B.A.Sc., E.I.T.<br />Mahmoud.Chaaban@gmail.com<br />www.linkedin.com/in/mahmoudchaaban<br />
2. 2. Introduction<br />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.<br />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).<br />
3. 3. Simple Interest<br />Total interest is linearly proportional to the initial principal amount. It is said to be simple interest.<br />I = (P) (N) (i) <br /> Where P = principal amount.<br /> (N) = number of interest periods.<br /> (i) = interest rate per interest period.<br /> I = \$1000 x 3 x 0.10 = \$300<br />Total amount = (P) + (I) = \$1,300<br />
4. 4. Compound Interest<br />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.<br />
5. 5. Economical Project Selection<br />Major Five area for decision taker<br /><ul><li>1- Minimum Attractive Rate of Return (MARR)
6. 6. 2- Net Present Value (NPV)
7. 7. 3- Annual Worth
8. 8. 4- Internal Rate of Return (IRR)
9. 9. 5- The Payback (Payout) Period</li></li></ul><li>Present worthNotation and Cash-Flow Diagram<br />(i) = effective interest rate per interest period<br />N = number of compounding periods<br />P = Present sum of money<br />F = Future sum of money<br />A = end-of-period cash flows<br />
10. 10.
11. 11. Economic Project Selection<br />2- Net Present Value<br /> NPV = PW of cash inflows – PW of cash outflows<br /> NPV = Revenue – Expenses<br /> NPV &gt; 0 ; Project is accepted<br /> NPV &lt; 0 ; Project is rejected<br /> NPV = 0 ; It is a risky project<br />3- Annual Worth<br /> AW (i%) = Revenue – Expenses – CR (i%)<br /> Where CR is capital recovery<br /> CR (i%) = I (A/P, i%, N) – S (A/F, i%, N)<br /> Where I = Initial Investment<br /> S = Salvage value at end of study period<br /> N = project study period<br />
12. 12. continued<br />4- Internal Rate of Return (IRR)<br /> By using PW formulation, we find i/% (IRR)<br /> PW = ΣR (P/F, i/ %,K) – ΣE (P/F, i/ %, K) = 0<br /> The point of PW = 0 defines i/%<br /> if i/ % ≥ MARR, the project is acceptable, <br /> otherwise not<br /> IRR is important to the lenders.<br />5- The Payback (Payout) Period<br /> Σ (R – E) (P/F, i%, K) – I ≥ 0<br /> Where i% is the MARR, I is the capital investment at k= 0<br />
13. 13. Before & After<br />
14. 14. General Project Life Cycle cost & Analysis<br />
15. 15. TVM Basic Topics<br /><ul><li>Application of Money-Time Relationships
16. 16. Benefit-Cost
17. 17. Comparing Alternatives
18. 18. Depreciation and Income Taxes
19. 19. Cost Estimation Techniques
20. 20. Price Change and Exchange Rates
21. 21. Replacement Analysis
22. 22. Dealing with Uncertainty</li></ul>“Our Course Project “<br />END=======================================<br />Another Important Index: Earned Value Analysis <br />in Project Management<br />
23. 23. Thanks<br />QUESTIONS ?<br />Mahmoud S. Ahmed, B.A.Sc., EIT<br />Mahmoud.Chaban@gmail.com<br />www.linkedin.com/in/mahmoudchaaban<br />
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