Time Value of Money

PV = FV/(1 + r)^t

FV= PV(1+r)^t

The Future Value (FV) of Cash is what needs to be optimized. The Future Value when considering it as an investment is the rate of return based on r. If you invest and r is high then you can likely spend more money than if r is low.

r = root(FV/PV, t)-1

However, if r is low then make a decision based on cost. Or figure out if it makes sense to invest at all.

Now r as I use it is an average gross margin rate over the last 12 months.

So what is the point of all this? When making decisions about capital it seems to be easy to get into the hole of optimizing cost before growth (especially when it’s your own). If product A costs x, and product B costs y the question should be which will increase r fastest.

Calculating this should be:

PV = Cost of Time + Cost of Product

t_0 = Time to Market

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