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Time Value of Money in Economies of Scale Essay

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Updated: Sep 21st, 2020

The time value of money (TVM) is closely related to the issue of the value of flexibility (VoF) of the decentralized engineering systems design (Cardin & Hu, 2016). The choice of the best approach to capacity deployment depends greatly on the TVM and the economies of scale (EoS) (Cardin & Hu, 2016). Also, the investigation of the VoF becomes easier by means of scrutinizing the tradeoff between the TVM and the EoS (Cardin & Hu, 2016). Therefore, flexibility is determined by the compromise between the EoS and the TVM. The TVM is also employed to reach the integration of infrastructure investment valuation and risk management (Espinoza, 2014). To do so, it is necessary to differentiate between the TVM and project risk. The TVM is delineated through the risk-free rates, and it reimburses the investors for contributing their money in a safe investment that generates a certain amount within some time period.

The project risk is portrayed through risk premium that is employed to assess the reparation above the risk-free rate of interest which might be required by a rational investor for accepting an extra risk instead of contributing money in government “treasury bonds” (Espinoza, 2014, p. 1056). Still, lumping the TVM with risk poses two threats: it separates project risks from their direct source and inherently presupposes that risk and time are easily exchangeable (Espinoza, 2014). Another crucial issue to take into consideration when discussing the TVM is that, together with inflation, it affects the inventory system (Jaggi, Khanna, & Nidhi, 2016). Therefore, it is necessary to recognize and analyze the influence of the TVM and inflation when establishing the most favorable inventory policy. Taking into consideration the discussed issues, it may be concluded that the TVM plays an important role in the financial system.

References

Cardin, M.-A., & Hu, J. (2016). Analyzing the tradeoffs between economies of scale, time-value of money, and flexibility in design under uncertainty: Study of centralized versus decentralized waste-to-energy systems. Journal of Mechanical Design, 138(1), 011401-1–011401-11.

Espinoza, R. D. (2014). Separating project risk from the time value of money: A step toward integration of risk management and valuation of infrastructure investments. International Journal of Project Management, 32(6), 1056-1072.

Jaggi, C. K., Khanna, A., & Nidhi, N. (2016). Effects of inflation and time value of money on an inventory system with deteriorating items and partially backlogged shortages. International Journal of Industrial Engineering Computations, 7(2), 267-282.

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