Unit 12: Time Value of Money (Present Worth Analysis)

Time Value of Money

A principle that money available today is worth more than the same amount in the future.

Cash Flow Diagram

A visual of inflows (revenue) and outflows (costs) over time.

Present Worth (P)

Current value of future cash flow using discount rate: P = F / (1 + i)^n.

Future Worth (F)

Value of present investment in the future: F = P(1 + i)^n.

Annuity to Future Worth

A = F × i / ((1+i)^n – 1)

Present Worth from Annuity

P = A × [(1+i)^n – 1] / [i(1+i)^n]

Project Viability Criteria

Project is viable if Present Worth (PW) > 0.

Example 1 - VW South Africa

Compared 3 technologies using PW at 20% interest rate.

Best Option - Example 1

Technology 2 selected due to highest PW.

Example 2 - Elevator Bids

Bid 1 selected using PW at 15% rate due to lower cost.

Mixed Cash Flow Analysis

PW analysis applied to varied revenue amounts across time.

Negative Present Worth

A negative PW indicates a non-viable project.

Excel Use in Analysis

Used for calculating present value of complex cash flows.

Adaptation to Projects

Time value and MARR principles help determine real-world project feasibility.