Adjusting Dollar Amounts for Time of Occurrence

We introduced the concept of the time value of money in Part 1 and showed basic discounting operations in the method formulas. Here we explain why, for a valid economic evaluation, it is necessary to discount dollar amounts which occur at different times to time-equivalent amounts at a common time. We discuss the implications of discounting for building decisions. Then we explain how to do it. We begin the “how to” part with guidelines for selecting a common time and modeling cash flows. Then we show how to discount a variety of cash flows with eight time-equivalence formulas. Because discounting operations are often combined with cost estimation, we show how to combine the two.1