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Project Cash Flow - Essay Example

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According to Sherrick, Elinger and Lins (2000, pp.3-4) If you are given the choice of being given $100 today or a week after you would certainly want to get the money today. If you analyze this simple situation you will realize that people want money immediately because they generally don't want to put off consumption i.e…
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Project Cash Flow
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Download file to see previous pages Therefore to have the money later you will certainly want a reasonable compensation for the delayed consumption, the risk or uncertainty and the inflation. All these factors: delayed consumption, uncertainty and inflation determine the interest rate over a certain amount of money which is due at present but the acquisition of which is put off till a future date.
In any situation when a person or group becomes or become indifferent to these three factors then the value of time to that person or group in that particular situation ceases to matter. The situation can be caused by internal factors as well as external factors or both. We can imagine few such situations, for example if in a hospital the anaesthesia machine goes bust in the mid of an operation and the standby machine is at some other OT then irrespective of rational comparisons a new machine has to be ordered because the situation demands it, or for example if there is fire in a factory and machines become unavailable for completing the order at hand worth millions of dollars then new machinery has to be arranged for as soon as possible without going into much details of profitability etc. The example that we have taken are extreme cases. In real life, situations generally lie mid way between conditions of very high emergencies to conditions of no pressure at all. There is usually existence of some pressures which limits the time that can be infinitely spent on arriving at the best analysis. In real life decision making is often done amidst many known and many unknown variables.1

Situations of absolute unpredictability Situations of absolute predictability

Reliance on the available and Reliance on complex decision making tools
easy to operate decision making tools
II) Time value of Money-estimating the discount rate
The predictability of a situation depends on a host of internal and external factors. Internal factors can include the knowledge and experience of the organization the management information and coordination systems, the resources and time available to the organization etc. The external factors can include the market forces and the business environment. In the case of applying time value analysis in project decisions the uncertain factor is the cost of capital 2.The estimation of cost of capital or the discounting rate is a complex process and its accuracy depends on many factors. Estimating the cost of capit ...Download file to see next pagesRead More
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