What Is The Formula For Calculating Your Net Worth Investment Timing and Duration

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Investment Timing and Duration

The company evaluates a number of investment projects every year. In the absence of financial stress, it will take all those projects, which have positive present value and reject those with negative present value. Further analysis may, however, indicate that some profitable projects may be more valuable (ie, may have higher net present values) if pursued in the future. If it can be linked that some unprofitable projects can generate good present values ​​to be adopted later. These types of investment projects may have different levels of suspension; some of them can be postponed as much as one or two times, while a few can be done at any time in the future. Those projects, while suspended, involve two alternatives: invest now, or later. The firm must determine the best time to invest.

The timing of investment can be an important factor in the case of those investment projects, while they are timely and those, while they are important for the strategy of the firm. Such projects cannot be established for a long time. Postponement also creates uncertainty. For example, current value analysis may indicate that a firm should introduce a new product next year. A firm may decide to introduce a product this year for two reasons: The firm may have a business plan to remain the market leader in introducing new products. If it expects that its competitors will introduce a product this year that it does not want, it can introduce a product this year to remain the market leader. Also due to unexpected competition from unknown sources the company may decide to introduce the product now.

Projects with different Lives

The correct way to choose between special projects with the same life is to compare the current prices, and choose the project with the highest available price. These two projects are unique in comparison, however, they may have different lives. Application of the net present value principle without accounting for differences in the life of projects may fail to indicate the correct choice. When analyzing such projects, we must answer this question: what will the firm do after the end of the short-term project if it is found instead of a long-term project?

Annual fair value method

Assume that we are going to choose one machine from two opposite machines named X and Y. In the selection between machines with different lifetimes, we replace each machine in the last year of its life. For analytical purposes, machine replacement chains may be assumed to extend over a period equal to the minimum lifetime of the machine.

How to handle the selection of joint projects with different lifetimes, as discussed above, can be very difficult if the lifetime of the projects is very long. Fortunately the problem can be dealt with in a simple way. We can calculate the equivalent annual cash flow for each project. We will choose the project with the lowest annual cost.

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