Time and Money in Project Management

Project Management (Business)

Return on Investment is applicable to decision making by the management by making use of projected proceeds in addition to the time value of money. The weighed up total cost of the project over the five-year time period of its life cycle $20 million. The intent of the organization is the plan to borrow this full amount and from then on recompense the debt every year in 5-year period at an annual compound interest rate of 10%. The future value of the loan amount taken by the organization at the end of the five-year period will be $32,210,200. Therefore, this implies that the minimum amount that the organization has to generate is $6,442,040 in order to recompense for the loan amount borrowed.

Project Overview

The bid proposal made by the organization is for a project in which the business is engrossed in perhaps attaining a new contract. The appraised cost of the project is $20 million over a period of five years. The company plans to borrow this whole amount and thereafter recompense the debt every year in 5-year period at an annual compound interest rate of 10%. The purpose of this bid proposal is to outline the total cost of the project at the end of the five-year life cycle and also determine the amount required to bid or earn from the work in terms of dollars to pay back the loan and still make some profit and cover operating expenses. This is in order to offer the organization on whether it ought to bid on the proposal and reasons thereto.

Amount Required to Bid or Earn from the Project to Pay Back the Loan

The main plan of the organization after bidding for the project and attaining it is to repay the principle amount borrowed back in the five-year period, which is the life cycle of the project. This will encompass the interest accrued in that five-year period as well. The principal amount borrowed will be annually compounded at an interest rate of 10% every year for the five-year period of the project. Compound interest is paid on the amount invested and the accumulated interest. The compound interest is determined by the following equation:

FV = P x (1 + i) n

Where FV = Future value

P = Principle

n = Time period (years)

i = Interest for every time period

FV = 20,000,000 x (1 + 0.1)5

= 20,000,000 x (1.61051)

= $32,210,200

The future value of the loan amount taken by the organization at the end of the five-year period will be $32,210,200 as illustrated above. Therefore, as the organization has taken the option to pay back this amount, the principal and the interest amount, it implies that every year the company is required to pay back:

$32,210,200 / 5 = $6,442,040

Therefore, this implies that the minimum amount that the organization has to generate is $6,442,040 in order to recompense for the loan amount borrowed.

Amount Required to Add to the Bid for Profit and to Cover Operating Expenses

The amount that the organization needs to add to the bid for profit and to cover operating expenses has to take into account the return on investment. The return on investment (ROI) is a significant benchmark employed by management to define of changes or the investments that are generating the outcomes projected or estimated (Project Management Institute, 2013). Return on Investment is applicable to decision making by the management by making use of projected proceeds in addition to the time value of money (Silvius, 2006). In particular, the time value of money sets all the financial state of affairs at a common point or even points in time by means of suitable rates of interest. ROI is the measure of the profit, which in this case is the output, over the investment which in this case is the input (Resch, 2011). The total investment in the five-year period will be $32,210,200. It can be assumed that the profit required by the organization is similar to the interest rate generated by the investment for a year.

ROI = Profit / Investment

6,442,040 / 32, 210,200 = 20%

This implies that the organization will have a ROI of 20%, which will make the project viable.

If the company wants to pay a total amount of $20,000,000, then it implies that it has to bid for an amount of: