My most recent use of TVM calculations was during the past year's Closure proposal and
negotiations. In order to determine the costs associated with future salaries, material, and
subcontractors, we had to assume rate increases for each. For example, when proposing a
salary for an electrician we assume the electrician received a standard merit (raise) of
3.25% each year. Therefore, that individual's salary would have gone from $75,000 to
$77,438 the second year and $79,761 the third year. With 1400+ project personnel, each
making different hourly rates and with ~30 different release dates over a 40 month period,
we had to use a compounding future cost calculation (similar to the compounding future
value calculation). In addition, when calculating each total salary cost, we needed to add in
costs associated with special pays (i.e., hazardous duty pays, weekend pays). The special
pays were negotiated to rise only once during the 40 month period at month 24. A similar
exercise had to be done for subcontractors, to address their future salary and material billing
costs. Our direct purchasing of material (i.e., toilet paper, pumps, PPE, fuel, natural gas,
caustics, acids) had to be forecasted also, with an assumed rate increase. The government
allowed certain rate increases for groups of items (i.e., office supplies were allowed to be
estimated with a 3% rate increase, industrial equipment/parts were allowed to be estimated
at an 8% increase, and fuel was assumed to be at a 15% rate increase).
These calculations allowed us to propose the 40-month Closure schedule using estimated
costs for the outer years. This allowed the government, once negotiated, to budget via
Congress the proper amount of dollars to close the facility. Of course, this allowed the
associated companies to perform their financial plans for the outer years also.
The amount of "government" cash flow for the negotiations impacted us a great deal. For
example, we originally proposed to the government a faster Closure plan. However, based
on political challenges and the government's current 5-year budget, concern was raised that
they couldn't afford the faster pace. So, we went back and spread the work another 6
months to ensure we can fit into the current budget plan.
After researching about the Time Value of Money (TVM) concept, I really understand one
of my late grandmother’s coined phrases “that which is in your hand is what is truly yours.”
Time Value of Money is the notion that money that you have in the present moment is
worth more than it will in the future. Money that you have access to can be invested in
stocks or investment property.
I have never had to use any TMV calculations; however, I always think about what I would
do if I won the lottery. I would opt for the lump sum up front. For example, if the payout
was $250,000 up front or $10,000 a year for 25 years. We can clearly see that the $250,000
would have a much greater return if invested now than at the end of the 25 years. If we
lived in a fairy-tale world where there was a third option of receiving that $10,000 at 8.5%
interest compounding for 25 years then it would be a totally different ballgame. Using the
formula, FVA=P(1+r/n)^ nt that same 10k would be earning $76,876.62 total in interest at
the end of 25 years. Then and only then my choice would be option#1 or #3 depending on
if I can afford to wait 25 years.
Time value of money is important because it helps families, investors, and people saving
for retirement determine how to get the most bang for their buck so to speak. The factor is
determined by the number of periods the cash flow will be impacted as well as the expected
rate of interest for the period. Time value of money works on the principle that money
today is worth more than the same amount of money received in the future. There are five
major components of time value and they are: rates, time periods, present value, future
value, and payments.I am a day trader on the markets to some degree and as such I invest
into equities that i have deemed to be a good risk. That being said from time to time I will
come across a small windfall in some trades. When this happens I review my options of
upcoming possibilities in the market as well as other potential opportunities. To those
opportunities I will take a known rate of return and extrapolate into the equation the time
willing to hold the cash in a particular fund. By using TVM, as stated above, I am able to
make wise calculated decisions .As I employed the above activities to my cash gained, I
have found that I can better manage my gains and losses by prior pre-planning by using
TVM. In 2017 I had a goal to start saving up for my 1st investment property. The issue was
the lack of sufficient funds for the down payment. Upon looking further into what I wanted
to buy and where the estimate of the downpayment was of $50000. Trying to figure out
how to make this happen I came across a bank that offered 6% interest rate on deposits.
Looking into this as an option I used the concept of TVM to find out the present value in
order to get a fixed future value.
My calculation as followed; Interest rate 6%, PERIOD 5 Y, FV($50000), PV (6%, 5, 0,
50000).
The results were that I had to deposit $37362.91 in the bank and it would take 5 years in
order for that amount to grow to the $50000 I needed for my investment property. I didn't
end up taking this option mainly because house prices only seem to go up and in five years
the amount of that property if it still happened to be around would have been much higher
but I did use TVM in order to check if that bank offer could be an option for me.
Time value considers the effect of compounding and gives us value of money therefore
with a cash ouflow of $37362.91 today locked in for 5 years as deposit I could have
received an inflow of $50000 with compounding of 6% interest annually. An example of a
situation when I used the time value of money (TVM) calculations to support a financial
decision either in your professional or personal life would be the time my sister and I had
brought a few trailer homes and took a mortgage to buy the investment property, the time
value of money equation is the present value of all of the payments I will need to make
over the term of your mortgage.
The TVM calculations you used to support the financial decision and the benefits this
provided is in the time value of money, or "TVM, is the idea that same amount of money
has different values at different times for example, five dollars in your purse today, is not
the same as five dollars a dozen years from now. A home mortgage is a great framework
for understanding TVM. You can calculate the future value of a mortgage by using the
formula P = principal balance. R = interest rate. N = number of times interest is
compounded.
The cash flow impacted my decisions, which is so important to lenders, that the cash flow
provides lenders with a picture of my businesses with the trailer homes and ability to pay
back a loan. In other words, it shows that my business brings in enough money to cover the
costs of any current debt our business has in addition to the cost of a new loan.
