Construction projects involve long-term investments, where the timing of cash inflows and outflows affects profitability.

This is why understanding the Time Value of Money (TVM) is essential.

1. Basic Concept

A rupee today is worth more than a rupee tomorrow because of its potential earning capacity.

Hence, costs and revenues must be analyzed in present-value terms.

2. Core Financial Tools

Method – Formula – Used For

Present Value (PV)

PV = F / (1 + i)ⁿ

Used For: Calculating today’s value of future cash.

Future Value (FV)

FV = P (1 + i)ⁿ

Used For: Estimating the future worth of current funds.

Net Present Value (NPV)

NPV = Σ (Rt - Ct) / (1 + i)ᵗ

Used For: Evaluating the profitability of an investment.

Internal Rate of Return (IRR)

Discount rate where NPV = 0

Used For: Comparing investment alternatives.

Benefit–Cost Ratio (B/C)

Present Value of Benefits / Present Value of Costs

Used For: Decision-making for project approval.

Example

A ₹10 Cr. investment yields ₹2.5 Cr. per year for 5 years.

At a discount rate of 10%,

NPV = 2.5 × ((1 – (1.1)⁻⁵) / 0.1) – 10 = ₹1.9 Cr.

Since NPV > 0, the project is financially viable.

4. Economic Feasibility Factors

• Interest rates and inflation
• Project life cycle and maintenance cost
• Market demand and revenue potential
• Loan repayment schedule

Key Takeaway:

Project budgeting is incomplete without analyzing financial returns over time.