time value of money, investment criteria and project rating index.pptx

Time Value of Money:
Learn why money today is more valuable than the same amount in the future. Explore present value, future value, annuities, perpetuities, and the impact of compounding.

Investment Criteria:
Master the essential metrics used for evaluating capital projects, including Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index. See practical calculation examples and pros & cons of each approach.

Project Rating Index:
Discover how organizations integrate multiple financial and strategic metrics using the Project Rating Index to rank and prioritize investment opportunities for optimal returns and risk management.

1. TIME VALUE OF MONEY, INVESTMENT CRITERIA & PROJECT RATING INDEX YOGESH DIXIT 24PGMBA126 3 rd SEM PM

2. TIME VALUE OF MONEY (TVM) TVM is a key concept in financial management. It helps you compare different investment options and solve practical problems involving loans, leases, and savings. Understanding TVM lets you make smarter decisions about when and how to use your money. Money today is more valuable than the same amount in the future. Why? Because it can earn interest or be invested to grow. This principle is central to finance: if you receive money now, you can put it to work—so it's worth more than waiting to receive it later.

3. Understanding the Time Value of Money (TVM) Money doesn’t hold the same value over time. A rupee today is worth more than a rupee tomorrow because of its potential to earn returns. That’s the core idea behind the Time Value of Money (TVM). It helps us assess how much future money is really worth in today’s terms—especially useful when evaluating investments, projects, or financial decisions. PV = FV/(1 + i) n • PV = present value — what the future money is worth today. • FV = future value — the amount you expect to receive later. • i = discount rate or interest rate. • n = number of time periods until you receive the money.

4. Why Money Has Time Value Preference for Present Consumption: People usually prefer spending now—it satisfies immediate needs and desires. Better Investment Potential: Money today can be invested to earn returns, making it more valuable over time. Example: Suppose someone is offered ₹10,000 today or after one year. Choosing it today means they could invest it in a fixed deposit or mutual fund and potentially earn ₹500–₹800 extra by next year (5-8%). Uncertainty of the Future: Cash you spend today is certain, but future income isn’t guaranteed. That risk makes today’s money more valuable. Impact of Inflation: Prices rise over time, so money today buys more than the same amount in the future

5. Why Time Value of Money Matters in Business Net Present Value (NPV): Add up the present value of all expected cash flows. If the total is positive, the project is financially worthwhile. Internal Rate of Return (IRR): Calculate the return rate that makes future cash flows equal the initial investment. If this rate exceeds your required return, the project is a good bet. Example: Imagine Titan is evaluating a ₹5 lakh investment in a new consumer research tool. If the projected returns over three years yield an IRR of 14%, and Titan’s benchmark is 10%, the project adds value and should be considered. Investment Decisions: Small businesses must use limited resources wisely. Factoring in the time value of money helps decide where and when to invest. Capital Budgeting: Projects like expansions or equipment purchases may take years to generate returns. Businesses need to assess whether future cash flows justify the upfront cost

6. Techniques of Time Value of Money There are two main ways to adjust for the time value of money: Compounding (Future Value) This method calculates how much your money will grow over time. Interest earned gets added to your principal, so each period builds on the last. Discounting (Present Value) This method works in reverse—it tells you what a future amount is worth today. It’s useful when comparing future payments to current investments. In short: Compounding grows your money forward. Discounting brings future money back to today’s value.

7. Q. Imagine we're offered two options: Option A – Receive ₹15,000 today Option B – Receive ₹15,000 after two years Even though the amount is the same, Option A is more valuable. With time on our side, we can invest the ₹15,000 and earn returns. Option B offers no growth — just delayed access. If we choose Option A and invest ₹15,000 at a simple annual rate of 5%, our money grows like this: Years Value Of Investment (₹) End Of 1 st Year 15750 End Of 2 nd Year 16537.50 Option B, however, gives us ₹15,000 after two years — with no interest earned. So, Option A results in ₹1,537.50 more — just by acting earlier.

8. INVESTMENT CRITERIA Investment criteria are the set of financial, strategic, and operational benchmarks used to evaluate and select potential investment opportunities. These criteria help investors determine whether an asset, project, or business aligns with their goals, risk tolerance, and expected returns. Type What It Evaluates Financial Criteria Expected returns, cost of capital, payback period, ROI, NPV, IRR Risk Criteria Market volatility, credit risk, regulatory risk, operational risk Time-Based Criteria Investment horizon (short-term vs long-term), breakeven timeline Liquidity Criteria How easily the investment can be converted to cash without loss Strategic Fit Criteria Alignment with business goals, brand values, or portfolio strategy Regulatory Criteria Compliance with laws, tax rules, environmental norms, and industry standards Operational Criteria Management capability, scalability, supply chain reliability ESG Criteria Environmental, Social, and Governance impact (increasingly vital for ethical investing)

9. Calculates present value of future cash flows minus initial investment. Compares discounted benefits to discounted costs to assess value creation. Finds the discount rate that makes NPV zero — used to compare project viability. Measures time required to recover initial investment from cash inflows. Evaluates profitability using accounting profits instead of cash flows.

10. Discounting Criteria: Investment evaluation methods that account for the time value of money, giving more weight to earlier cash flows. Non-Discounting Criteria : Simpler methods that ignore time value of money and treat all cash flows equally, regardless of timing. Method Formula NPV BCR )/ Initial Investment IRR Set NPV = 0 & solve: PBP ARR Method Formula NPV BCR IRR PBP ARR Symbol Meaning C Cash flow in a specific year B Benefit or gain from the investment r Discount rate (interest or cost of capital) T Time period in years

11. Year Cash Flow (₹) 1 35,000 2 40,000 3 35,000 4 45,000 5 20,000 Q. A company is evaluating a project that requires an initial investment of ₹1,80,000. The project is expected to generate the following cash flows over 5 years: The company uses a discount rate of 10% to evaluate projects. NPV, BCR, IRR, PBP, ARR

12. This means the investment is not financially viable under the given assumptions. BCR > 1 → Project is economically viable BCR < 1 → Project is not viable BCR = 1 → Break-even

13. IRR ≈ –1.5% This means the investment yields a negative return and is not financially viable under current assumptions.

14. Year Cash Flow (₹) Cumulative Recovery (₹) 1 35,000 35,000 2 40,000 75,000 3 35,000 1,10,000 4 45,000 1,55,000 5 20,000 1,75,000 The investment of ₹1,80,000 is recovered in 4.25 years through cumulative cash inflows. The project yields an average annual return of ₹35,000 , which is 19.44% of the initial investment.

15. Method What’s Good What to Watch Out For DISCOUNTING NPV Shows total value added after adjusting for time; great for big decisions Needs a reliable discount rate; not intuitive for non-finance users IRR Gives a clear % return; easy to compare with targets or bank rates Can mislead with uneven cash flows; assumes reinvestment at same high rate BCR Tells you how much value you get per ₹1 invested; ideal for public projects Doesn’t show total profit; can exaggerate viability if benefits are front-loaded NON-DISCOUNTING PBP Simple and fast; shows how quickly you recover your money Ignores what happens after payback; skips time value of money ARR Easy to explain; uses accounting data and gives a % return Based on profit, not cash flow; ignores timing and real investment recovery

16. PROJECT RATING INDEX Project Rating Index (PRI) is a ratio that compares the present value of benefits to the present value of costs. It helps assess whether a project is financially worthwhile. Formula: PRI = Interpretation: PRI > 1 → Viable PRI = 1 → Break-even PRI < 1 → Not viable  

17. Q. Initial Investment: ₹1,80,000 Total Present Value of Benefits: ₹1,75,000 (from cash flows) PRI = ≈ 0.97 PRI < 1, Project is not financially viable under current assumptions  

18. Advantages Limitations Simple and intuitive for quick decisions Doesn’t show total profit Useful for comparing multiple projects Sensitive to discount rate Ideal for public sector and regulatory evaluations Can mislead if benefits are front-loaded or inflated Supports transparent, evidence-based prioritization Not ideal for comparing projects of very different scales

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