Time Value of Money
According to Chen et al. (2015), the time value of money can be interpreted based on a cultural and financial viewpoint. From a financial perspective, people are concerned about risk and inflation. On the other hand, the cultural perspective is based on the assumption that people prefer receiving benefits as soon as possible. The concept of the time value of money is important to long-term project decisions because it can impact the project’s budget. For example, an increase in the dollar’s value can increase the cost of raw materials. Inflation can significantly impact the cost of raw materials, influencing the project’s budget. Therefore, project managers have to monitor the changes in the value of money to predict the changes that may negatively impact the project budget to avoid project failure.
The time value of money is also important in capital budgeting in long-term project decisions because it helps the project team effectively conduct capital budgeting. Abinaya (2022) argues that the time value of money makes it easier for managers to maintain flexibility in the cash flows by discounting the current value of money. The discount rate is determined by factors such as the project’s cost, the return expected by the project owners and investors, and the return gained by the organization for investing in the project. The time value of money is also important in making capital expenditure decisions within the project by approximating the negative and positive cash flows. The project owners may decide to abandon a project if there are many negative cash flows beyond their control or postpone the project to a later date. Project teams can also use the time value of money to determine whether there are enough financial resources to complete the project successfully.
References
Abinaya. (2022). Importance of time value of money: Time to understand TVM. Open Education Portal. Retrieved December 6, 2022, from https://www.openeducationportal.com/importance-of-time-value-of-money/
Chen, G. G., Weikart, L. A., & Williams, D. W. (2015). Time Value of Money. In Budget tools: Financial methods in the public sector. Essay, Sage.
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