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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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Finance Questions

Hello, I already have this done, however I want to be sure that I am correct with my answers and understand this properly. I need this rather quickly and any help would be greatly appreciated. Thanks!

1. The goal of the firm should be the maximization of profit. (True/False)

2. For the risk-averse financial manager, the more risky a given course of action, the higher the expected return must be. (True/False)

3. The corporation is the best form of organization in terms of raising capital? True/False

4. The owners of a corporation enjoy unlimited liability.(True/False)

5. Financial management is concerned with the maintenance and creation of wealth.(True/False)

6. Shareholder wealth is measured by the market value of the firm's common stock. (True/False)

7. Which of the following statements best represents what finance is about?
a. How political, social, and economic forces affect corporations
b. Maximizing profits
c. Creation and maintenance of economic wealth
d. Reducing risk

8. The goal of the firm should be:
a. Maximization of profits.
b. Maximization of shareholder wealth.
c. Maximization of consumer satisfaction.
d. Maximization of sales.

9. Consider the timing of the profits of the following certain investment projects:
Profit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
a. Project S is preferred to Project L.
b. Project L is preferred to Project S.
c. Projects S and L are equally desirable.
d. A goal of profit maximization would favor Project S only.

10. Which of the following best describes the goal of the firm?
a. The maximization of the total market value of the firm's common stock
b. Profit maximization
c. Risk minimization
d. None of the above

11. Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?
a. Profit maximization
b. Risk minimization
c. Maximization of the total market value of the firm's common stock
d. None of the above

12. In finance, we assume that investors are generally:
a. neutral to risk.
b. averse to risk.
c. fond of risk.
d. none of the above.

13. Which of the following is not an advantage of the sole proprietorship?
a. Limited liability
b. No time limit imposed on its existence
c. No legal requirements for starting the business
d. None of the above

14. The true owners of the corporation are the:
a. holders of debt issues of the firm.
b. preferred stockholders.
c. board of directors of the firm.
d. common stockholders.

15. Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?
a. Corporation
b. General Partnership
c. Sole proprietorship
d. Limited partnership
16. If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:
a. positively affect profits.
b. increase the market value of the firm's common stock.
c. either increase or have no effect on the value of the firm's common stock.
d. accomplish all of the above.

17. Profit maximization is not an adequate goal of the firm when making financial decisions because:
a. it does not necessarily reflect shareholder wealth maximization.
b. it ignores the risk inherent in different projects that will generate the profits.
c. it ignores the timing of a project's returns.
d. all of the above are correct.

18. Which of the following goals is in the best long-term interest of stockholders?
a. Profit maximization
b. Risk minimization
c. Maximizing of the market value of the existing shareholders' common stock
d. Maximizing sales revenues

19. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?
a. Unlimited liability of shareholders
b. Access to the capital markets
c. Limited life
d. Elimination of double taxation on corporate income
e. All of the above

20. Which of the following should be considered when assessing the financial impact of business decisions?
a. The amount of projected earnings
b. The risk-return tradeoff
c. The timing of projected earnings; i.e., when they are expected to occur
d. The amount of the investment in a given project
e. All of the above

21. Financial management is concerned with which of the following?
a. Creating economic wealth
b. Making investment decisions that optimize economic value
c. Making business decisions that optimize economic wealth
d. Raising capital that is needed for growth
e. All of the above

22. If one security has a greater risk than another security, how will investors respond?
a. They will require a lower rate of return for the investment that has greater risk.
b. They would be indifferent regarding their expectation of rates of return for either investment.
c. They will require a higher rate of return for the investment that has greater risk.
d. None of the above.

23. How could you compensate an investor for taking on a significant amount of risk?
a. Increase the expected rate of return.
b. Raise more debt capital.
c. Offer stock at a higher price.
d. Increase sales.

24. If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?
a. $1,000 in five years because they are not good at saving money.
b. $1,000 today because it will be worth more than $1,000 received in five years.
c. $1,000 in five years because it will be worth more than $1,000 received today.
d. Investors would be indifferent to when they would receive the $1,000.
e. None of the above.

25. Why do investors prefer receiving cash sooner rather than later, according to finance theory?
a. Incremental profits are greater than accounting profits.
b. Money received earlier can be reinvested and returns can be increased.
c. Tax considerations are important when investing.
d. Diversification leads to increased value.

26. Investors choose to invest in higher risk investments because these investments offer higher:
a. expected returns.
b. inflation.
c. actual returns.
d. future consumption.

27. Foregoing the earning potential of a dollar today is referred to as the:
a. time value of money.
b. opportunity cost concept.
c. risk/return tradeoff.
d. creation of wealth.

28. Difficulty in finding profitable projects is due to:
a. social responsibility.
b. competitive markets.
c. ethical dilemmas.
d. opportunity costs.

29. Corporations receive money from investors with:
a. initial public offerings.
b. seasoned new issues.
c. primary market transactions.
d. a and b.
e. all of the above.

30. Investors prefer $1 today versus $1 in the future due to:
a. time value of money.
b. opportunity cost.
c. agency problems.
d. a and b.
e. all of the above.

31. Which of the following is true regarding an initial public offering?
a. The corporation gets proceeds from the investor.
b. Investors get proceeds from other investors.
c. The security is sold for the first time to the public.
d. Both a and c.
e. All of the above.

32. Which of the following is not a principle of basic financial management?
a. Risk/return tradeoff
b. Incremental cash flow counts
c. Efficient capital markets
d. Profit is king

33. Which of the following statements is false?
a. All risk can be diversified away.
b. Measuring a project's risk is difficult.
c. Projects should focus on incremental cash flows.
d. Taxes play a significant role in project analysis.

34. Compare and contrast primary market and secondary market transactions as it relates to the flow of funds in the transactions.

35. What is incremental cash flow and how is it used in project analysis?

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