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Time Value of Money and the Effects on Project Management

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As the project manager, explain how the Time Value of Money will impact a home building project. Demonstrate by example of a home building project why it is important for companies to consider Time Value of Money when selecting projects to undertake.

-How can delaying a project task decision affect the Time Value of Money in a positive way?
-In a negative way?

Include an appendix for projection of costs to the home building project for in excess of one (1) year and a spreadsheet that illustrates the interpretation of the results and identifies at what point in the home building project decisions will effect on the cost of money.

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In order to respond and understand this request for information, we need to explore three separate but inter-related areas / principles associated with the time value of money. These three areas include:

* principle of time value of money
* principle of project management
* principle of earned value management

All of the above have finance as the basis for how each are managed, and all relate to gaining a financial return for the investment project mentioned above, namely that of a home building project.

Let's first discuss some of the areas that are included within a home building project --- we are assuming as the basis for this example that a home building project includes the establishment of a series of homes designed to create a community, as opposed to the building of a single home. And for purposes of this request, we will highlight the various areas of a home building project, and leave it to you to become more detailed if necessary. So some of the requirements for a home building project will include:

* gaining the funding for the project
* design of the project
* gaining the necessary approvals and licenses in order to proceed with the project
* surveying the area to be used
* the actual ground work required
* the placement of utilities before the actual building of homes
* plotting the streets, parks, etc.
* foundation and cement work
* the various stages of building the home including:

* foundation
* framing
* rough in electrical and plumbing
* roofing
* insulation
* dry walling
* painting
* finish work of electrical, plumbing, tile/carpet, cabinets, and other finishing accessories
* finish cement work
* landscaping
* final sales efforts

Now these may not be totally inclusive of the project, but it represents the main points of home building. We also have not mentioned other project items, such as public streets, fire hydrants, parks/recreation areas, possible area set aside for an elementary school, and the like. These can all be factored into the needs of the project. Inclusive of all of this is the actual defining of a project, which looks like this according to Investopedia/Yahoo Finance:

DEFINITION OF 'PROJECT MANAGEMENT'
The planning and organization of an organization's resources in order to move a specific task, event or duty toward completion. Project management typically involves a one-time project rather than an ongoing activity, and resources managed include both human and financial capital.

A project manager will help define the goals and objectives of the project, determine when the various project components are to be completed and by whom, and create quality control checks to ensure that completed components meet a certain standard.

INVESTOPEDIA EXPLAINS 'PROJECT MANAGEMENT'
Project management is often closely associated with engineering projects, which typically have a complex set of components that have to be completed and assembled in a set fashion in order to create a functioning product. Project managers use visual representations of workflow, such as Gantt charts and PERT charts, to determine which tasks are to be completed by which departments.

Read more: http://www.investopedia.com/terms/p/project-management.asp#ixzz3asngO18x
Follow us: @Investopedia on Twitter

Based upon the above definition, ...

Solution Summary

This solution provides a discussion of how the time value of money can have positive and negative influences on a long term investment project.

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Discounting Methods: The concept of discounting should be used in order to keep track of real costs for the purpose of planning.
Calculate the present value of the estimated benefit stream at all three discount rates. Explain the effect of higher and lower discount rates.

Hopeful House, a nonprofit orgnanization serving the Big City community, is considering building a playground. It needs to rationally convince the Community Chest that its project is worthy of a special grant by calculating the present value of future benefits. The financial manager estimates future benefits of the playground at $10,000 that will be realized at the end of a four year period. Further, he recommends using a discount rate of 9%. His executive director thinks that his discount rate is too high and she recommends using 8%. The Community Chest associate, however, insists both rates are too low and wants them to use 10%. Calculate the present value of the estimated benefit stream at all three discount rates. Explain the effect of higher and lower discount rates.

Hint: Please see attached file

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