Effect of delays on the present value of a project

The present paper examines the effects of delays in project completion and/or attainment of full capacity production on the discounted present value of a project. The decision-making technique developed in the ensuing presentation can guide a project director in dealing with situations created by project delays and over-estimation of expected demands for a particular product. More specifically, the technique may be used to (i) determine when the discounted present value of a project becomes negative due to delays and, therefore, should be abandoned, (ii) determine which projects should receive special attention after a suspension of construction and/or production activities due to events such as strikes and delays in procurement, (iii) establish the increase in price per unit of output required to counter balance losses due to delays, and (iv) to perform a sensitivity analysis of forecasts of production. The decision-making technique is directly applicable to production transformation processes; similar techniques may be developed to analyze the effects of delays on the discounted present value of other capital investment projects such as the building of roads and irrigation projects by redefining the variables to be included in the model.