Module-I: Time Value of Money

Module-I: Defining Time Value of Money

• Time value of money is a mechanic using compound interest factors to express cash flows occurring at different times to a single equivalent payment.
• Interest rates are essential for understanding compound interest.
• Interest rate is the earning power of money, increasing its numerical value over time due to interest and time factors.
• Interest is the cost of using capital and the reward for parting with liquidity (saved money).
• Two common interest rates are simple interest and compound interest.
• Other relevant interest rates used in project evaluations include nominal interest rate, effective interest rate and continuous effective interest rate.
• Nominal interest rate reflects an annual interest rate derived from a periodic interest rate and the number of periods in a year.
• Effective interest rate is the ratio of interest to principal amount, used in comparing investments
• Ieff = (F - P)/P = I/P where ieff is effective interest rate, F is future value, P is principal amount and I is interest
• When the interest rate is nominal, ieff = (1 + i/m)^m - 1, where i is the nominal interest rate and m is the number of compounding periods per year.
• As m approaches infinity, the effective interest rate becomes continuous, giving Lim (1 + i/m)^m as m approaches infinity = e^i - 1, where e is the mathematical constant approximately equal to 2.718.
• Compound interest factors are applied to single sums or multiple series to produce equivalent sums or series.
• Simple interest rates are either exact, based on calendar dates, or ordinary, using a generalized time period.

Module-II: Cash Flow Diagrams

• Cash flow diagrams are graphical representations of inflows and outflows over time.
• Inflows are shown above the time line with a positive sign, while outflows are below with a negative sign.
• Cash flow diagrams illustrate magnitude and direction of cash flows.
• Cash flow transactions can be single cash flows, uniform series, linear gradient series, geometric gradient series, or irregular series
• Single payment cash flows involve one present or future cash flow.
• Uniform series involve a series of equal amounts occurring at equal intervals, also known as annuity.
• Linear gradient series display arithmetic progression properties, with cash flows increasing or decreasing by a fixed amount.
• Geometric gradient series exhibit geometric progression properties, increasing or decreasing by a fixed ratio (or percentage).
• Irregular payment series show a lack of overall pattern in cash flows over time.

Module-III: Time Value Equivalence

• Time value equivalence is based on equivalent numerical value, not purchasing power.
• Cash flows producing the same effect are deemed equivalent.
• For instance, INR 1000 today can be equivalent to potentially having INR 1210 after two years with a 10% annual interest rate.
• Calculating equivalence helps compare different options or cash flows at a common time reference.
• Calculating time value equivalence is also important for economic evaluations of projects

Module-IV: Present Worth Comparisons

• Present worth method converts future cash flows to their equivalent present values based on a discount rate.
• By comparing present worth amounts of alternatives, the best option can be identified.
• Assumptions include all cash flows known, a given time period and interest rate, constant time value of money, consideration only of before-tax cash flows, no intangible factors, and no considerations of the availability of funds for implementation.
• The Present Worth of a cash flow is calculated by dividing each individual cash flow by (1 + i)^n, where I is the interest rate and n is the number of periods until the cash flow occurs.

Module-V: Payback Period Method

• Payback period is the length of time it takes for an investment's cash inflows to recover its initial outflow.
• This method assesses risk, not profitability.
• Cash flows beyond the payback period are disregarded.
• This method is simplest, and works best for small investment projects.

Module-II: Equivalent Annual Worth (EAW) Method

• Equivalent Annual Worth (EAW) method expresses cash flows in terms of equal yearly payments.
• A project's Equivalent Annual Worth reflects its equivalent annual cost or benefit.
• EAW is used for comparing projects with different lifespans or cash flows.

Module-III: Depreciation

• Depreciation is the decrease in an asset's value.
• Primarily calculated yearly and represents permanent, continuing, and gradual reduction in book value.
• Causes of depreciation include physical deterioration, time factors, accidents, depletion, deferred maintenance, inadequacy, and obsolescence.
• Depreciation calculation methods include straight-line, declining balance (including double declining), and modified accelerated cost recovery system (MACRS).

Module-IV: Costing

• Costing is a procedure for determining the cost of activities, products, or services; especially in manufacturing.
• Includes product costs, assigning costs to work-in-process, finished goods.
• Steps for product costing involve: cost collection and classification, and finding the appropriate costing method like job costing versus process costing.

Module-IV: Costing (Continued)

• Cost classification can include direct material, direct labor, overhead, and other expenditures.
• Overheads can be classified as functional, element-wise, and behavioral.
• Choices of methods of costing include job costing and process costing.
• Job costing involves costs for specific jobs, unlike process costing which determines average unit costs in processes with continuous/multiple stages
• Costing techniques include marginal costing, direct costing, absorption costing, and historical costing, standard costing.

Module-IV: Cost Control

• Cost control involves regulating costs by executive actions guided by cost accounting
• Cost control techniques include budgetary control, and standard costing.
• Budgetary control sets budgets for responsibilities to achieve policy objectives
• Steps in Budgetary Control include defining objectives, formulating plans into budgets, allocating responsibilities and comparing actuals with budgets

Module-IV: Standard Costing

• Standard costing is a method for pre-determining standard costs compared to actuals
• Standards for material, labor, and overheads are predetermined.
• Current standards reflect current conditions, basic standards are for the long run, normal standards represent the average over a period.
• Standard costing steps include defining standards, measuring actual performance, compute variances, analyze causes of variances, and implement corrective actions.

Module-IV: Variance Analysis

• Variance analysis is the examination of differences between actual performance and pre-determined standards.
• Categories include profit, cost, and sales variances, further broken down into specific variances (e.g., material price, material usage, labor rate, labor efficiency, expenditure, and efficiency variances).

Module-IV: Cost Reduction

• Cost reduction aims for a permanent decrease in the unit cost of products/services without compromising quality.
• Features of cost reduction emphasize the real and permanent nature of the decrease, maintenance of quality or fit-for-use, and avoidance of harm to the suitability or value of the products/service.

Module-V: Sensitivity Analysis

• Sensitivity analysis (SA) investigates how a change in one factor affects other results, particularly the net present value (NPV) of a project.
• The objective of sensitivity analysis is to identify sensitive variables; that is, variables that have a large proportional effect on the NPV when a variable changes.

Additional Notes

• Question formats varied in the provided text, from multiple choice to short-answer questions.
• Questions cover a variety of topics within the modules.
• Topics and subtopics within modules are also extensively linked.

Explore the concept of the time value of money in this Module-I quiz. Understand the mechanics of compound interest and the roles of different interest rates in financial evaluations. Delve into simple and compound interest as well as effective rates for comparing investments.