Time Value of Money: Essence
There are many factors that may influence the development of the current project and define if the idea to sell T-shirts with the logo “SENIOR 2016” can be justified and beneficial for its developers. In this part of the project, it is necessary to discuss the concept of the time value of money and understand how it can impact the project, create a spreadsheet that can illustrate the interpretation of the costs and the effects of the project decisions on the cost of money.
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People say that time is money, and they have a good reason to say so (Heldman, 2011). The point is that a dollar is a currency that is not stable. Today, a dollar is usually worth more in comparison to a dollar in one year (Kerzner, 2013). It can be explained by the evaluation of such a concept as the time value of money. This concept helps to realize if the revenue stream for the project under consideration can be worth more than it costs today and if it is beneficial to continue working on the project (to produce T-shirts with a special label “Senior 2016). It is evident that if people have access to some money today and have an idea to be developed, it is reasonable to invest money and believe that it is possible to make a profit. However, it is very important to understand the relation between money that can be received in one year and the worth of money today. There is a definite formula that helps to calculate the difference and understand what changes can be expected in one, two, or a whatever-it-needs period of time.
FV = PV*(1+k)n
In this formula:
FV is Future Value of an investment
PV is Present Value
k is the cost of capital (or the interest rate)
n is the number of years for the analysis
Taking into consideration these issues, it is possible to understand the changes invested money may undergo in one year.
Time Value of Money: Impact on a Project
As a rule, project managers do not make business decisions in regards to their projects. However, a good project manager has to be concerned with time, cost, payback periods, and return on investment (Bianco, Nelson, & Poole. 2010). That is why the time value of money is the concept that plays an important role in the chosen business: businessmen want to know the worth of the investments today, as well as the total value of the investments in regards to the project. The current project will have cash flows that occur today and will occur in the future. The implementation of the technique of discounted cash flow helps to consider the timing during which profits can risk and show the effective rate of return on the total investment of the project (Venkataraman & Pinto, 2008).
In general, in this project, it is suggested to borrow $1000 in order to produce 200 T-shirts. It is expected to set the price of the product at about $10. Then, the sale of 200 T-shirts will bring $2000. However, it is also necessary to consider the fact that a dollar today will cost most in one year. And it is hard to neglect the fact that today’s investment differs a lot from the one-year income. That is why the time value of money is important for the project under analysis. Its identification helps to make correct financial solutions and understand the potential worth of decision delays.
Time Value of Money: Importance for Companies’ Consideration
It is not an easy task to start up a new business. It is hard to forecast the nature of the outcomes and realize if the project can produce positive cash flow in a short period of time. The peculiar feature of the current project is its label, “Senior 2016”. It means that the project has to be properly organized and even finished in one year. Still, other companies that are not bothered with the identification of the year in their production have to consider the time value of money properly.
There is a discount rate that investors should pay attention to while working on different projects. This rate may be predetermined by a number of factors like the interest rate (in case money is borrow at the bank), the level of return the investor can earn, the level of return available to the company itself, the level of inflation, and even the risk of the project failure. It is important for the company to come up with a reasonably accurate figure and make correct decisions, delayed or made on time. The companies should know how to calculate the time value of money because they become able to make yes-no decisions and realize which project among the competing one is more profitable. It can be done by two methods: the first method is the calculation of the net present value, and the second method is the identification of the internal rate of return. The companies should know all possible problems and financial challenges and make the solutions that correspond to their own philosophies and expectations.
Time Value of Money and a Project Task Decision: Positive and Negative Aspects
In general, there may be observed positive and negative impacts of delays in making decisions in regard to the time value of money. Though project managers have to complete each task and pass through each stage in accordance with the schedule and the time set or even earlier, there are cases when delays may take place. Any kind of delay may become a defeat for the company as well as for the investor. Sometimes, a tension may take place between the company that needs some investments and the sponsors. The team may want to decisions and answers in a short period of time, and the sponsors may want to have more time to evaluate the situation.
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On the one hand, a delay can make the project cost less. The decisions that are delayed provide the sponsors with an opportunity to gather more information on the project to invest in and consider the business intelligence of the team. In fact, the time value of money defines the nature of the effects of any kind of delay. It happens that today, the costs are more expensive than the same costs that may take in one month or one year. On the other hand, the delays in the decisions can lead to further impossibility to make a contract and invest in the project that can turn out to be rather successful.
The point is that projects without clearly established penalties may suffer considerably. In their turn, the sponsors think that they can benefit more than defeat with their delayed decisions. That is why any project manager has to fight any kind of delay and provide clear reasons for why it is necessary to make fast and definite decisions. The time value of money is a good reason to prove that the current project is a good opportunity to invest money in and benefit a lot with time.
Bianco, C.A., Nelson, D.T., & Poole, B. S. (2010). Teaching time value of money. The Business Review, 16, 25-31.
Heldman, K. (2011). Project management jumpstart. Hoboken, NJ: John Wiley & Sons.
Kerzner, H. (2013). Project management: a systems approach to planning, scheduling, and controlling. New York City, NY: John Wiley & Sons, Inc.
Venkataraman, R.R. & Pinto, J.K. (2008). Cost and Value Management in Projects. Hoboken, NJ: John Wiley & Sons, Inc.