Transcript Time Value for Money

Avimanyu Datta
TIME VALUE FOR MONEY
Time Value of Money based on:
Net Economic
Benefits
One Time
Fixed Cost
Estimation of Time Value
of Money is as good as
the estimation of the
four antecedents
Time Value
of Money
Discounted
Rate*
Recurring
Cost
* Discounted Rate can be
different for Benefits and Cost.
We will assume they are same
Compute Present Value of
Benefits
 Given Net Economic Value (from year 1 onwards) =
40,000
 Assume Discounted Rate is 10%
 Assume Window of time frame is 5 years
 Present Value of Benefits for year n=
40,000* (1/(0.1+1)^n) .
Thus,
For Year 1 the value will be 40,000 *. 91 = 36363.64
For Year 2 the value will be 40,000 *.83 = 33057.85
Compute Net Present Value of
Benefits
 For Year 0 NPV of Benefits = PV of Benefits.
 For Year 1 and beyond NPV of Benefits can be computed
using :
NPV of Year N = NPV (n-1)+ PV (n)
NPV = PV
NPV (n) = NPV (n-1)+ PV (n)
Compute Present Value of Costs





Assume Fixed Cost = 32000
Assume Window of time frame is 5 years
Recurring cost from Year 1 onwards = 25000
Assume Discounted Rate is 10%
Present Value of Recurring for year n=
25,000* (1/(0.1+1)^n) .
Thus,
For Year 1 the value will be 25,000 * .91 = 22727.27
For Year 2 the value will be 25,000 *.083 = 20661.16
Compute Net Present Value of
Costs
 For Year 0 NPV of Costs = One Time Fixed Cost
 For Year 1 and beyond NPV of Costs
NPV of Cost for Year N = NPV (n-1)+ PV (n)
NPV =
One Time
Cost
NPV (n) = NPV (n-1)+ PV (n)
Overall NPV and Overall ROI
 Overall NPV = NPV (benefits)- NPV (Costs)
 Overall ROI = Overall NPV / NPV (Costs)
NPV (benefits)- NPV (Costs)
Overall NPV / NPV (Costs)
BreakEven Analysis
 Yearly NPV Cash Flow: (PV of benefits - PV of
recurring Costs)
 Overall NPV Cash Flow: (NPV of all benefits-
NPV of all Costs
 Break Even Ratio Use the first year of positive
cash flow to calculate the break even fraction :
(Yearly NPV Cash Flow - Overall NPV Cash Flow)/
Yearly NPV Cash Flow
BreakEven Analysis
(PV of benefits - PV of recurring Costs)
(Yearly NPV Cash Flow - Overall
NPV Cash Flow)/ Yearly NPV Cash
Flow
Overall NPV Cash Flow: (NPV
of all benefits- NPV of all
Costs)