Investment in Operation Business Activities

Investment in Operation Business Activities - McGill...

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McGill Faculty of Engineering MIME 310 Engineering Economy 1 Chapter 10 – Investment in Operating Business Activities Section 1: Introduction • Investment in Operating Business Activities • Factors to Consider • Methods of Analysis Section 2: Purchase / Lease Decisions • Financial Lease • Evaluation Procedure Section 3: Equipment Replacement Decisions • Defender / Challenger Concept • Economic Life Concept • Treatment of Salvage Values • Opportunity Cost Approach versus Trade-in Approach Outline
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McGill Faculty of Engineering MIME 310 Engineering Economy 2 Section 1: Introduction Investment in Operating Business Activities Concerns investment opportunities encountered in an operating business. For example: § Choice of appropriate processes § Choice of appropriate equipment § Equipment overhaul or replacement § Expansion of operating activities These decisions are made on the basis of DCF criteria.
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McGill Faculty of Engineering MIME 310 Engineering Economy 3 Factors to Consider § B enefits (future savings or increased revenue) § Sunk costs § Income tax effects § Planning period § Effects of techno logical improvements Methods of analysis Any appropriate DCF criterion, coupled with the use of tax factors in simple cases, or year-by-year cash flow analysis in more complex situations. Section 1: Introduction
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McGill Faculty of Engineering MIME 310 Engineering Economy 4 P Section 1: Introduction • Investment in Operating Business Activities • Factors to Consider • Methods of Analysis Section 2: Purchase / Lease Decisions • Financial Lease • Evaluation Procedure Section 3: Equipment Replacement Decisions • Defender / Challenger Concept • Economic Life Concept • Treatment of Salvage Values • Opportunity Cost Approach versus Trade-in Approach Outline Chapter 10 – Investment in Operating Business Activities
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McGill Faculty of Engineering MIME 310 Engineering Economy 5 The decision to acquire the asset is not at stake here. Rather, we are concerned with the method to be used to finance the acquisition of the asset. § Debt or equity § Financial lease Financial Lease Contractual agreement under which the owner of an asset (lessor) allows a second party (lessee) to use the services of that asset during a specified period of time in exchange of a series of payments. Section 2: Purchase / Lease Decisions
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Faculty of Engineering MIME 310 Engineering Economy 6 Characteristics § Permits the use of an asset without owning it § Price and delivery terms are arranged with manufacturer § Lease agreement made with financial institution – lease contract § Lease contract terms • Cancellation clause • Duration • Payments usually result in the full amortization of lessor’s investment, including a specific return on investment • Option to renew lease at a reduced rate at expiration date or purchase asset at a specific price • Responsibilities of parties concerning maintenance, insurance, etc. Section 2:
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This note was uploaded on 04/10/2008 for the course MINE 310 taught by Professor Bilido during the Spring '08 term at McGill.

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Investment in Operation Business Activities - McGill...

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