chapter 4 Evaluation of Business & Engineering Projects - Chapter 4 Evaluation of Business Engineering Projects 1 Introduction As investments

chapter 4 Evaluation of Business & Engineering Projects...

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1Chapter 4Evaluation of Business & Engineering Projects
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2IntroductionAs investments involve large resources, wrong investment decisions are very expensive to correct Managers are responsible for comparing and evaluating alternative projects so as to allocate limited resources and maximize the firm’s wealthBasic techniques of making capital investment appraisal for evaluating proposed capital investment projects
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3IntroductionInvestment therefore assumes that the investment will yield future income streamsInvestment appraisal is all about assessing these income streams against the cost of the investmentNot a precise science!A fork lift may be an important item but what does it contribute to overall sales? How long and how much work would it have to do to repay its initial cost?Copyright: Loisjune, stock.xchng
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4Investment appraisal methodsConsidering the time value of money conceptIgnoring the time value of money conceptNet present value Internal rate of returnPayback periodAccounting rate of return
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5Payback period
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6Payback periodPayback period is the period of time it takes for a company to recover its initial investment in a projectThe method measures the time required for a project’s cash flow to equalize the initial investment
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7Acceptance criterion< predetermined cutoff periodAccept the project> Predetermined cutoff periodReject the project
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8Example
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9A company is considering making the following mutually exclusiveInvestments in the production facilities for the new products with an Estimated useful life of four years. The cash inflow and outflows areListed as follows:Project AProject B$$Initial investment9000001000000Cash inflow at the end of yearYear 1700000600000Year 2100000400000Year 3100000400000Year 41300000400000Project A : 3 yearsProject B: 2 yearsProject B takes only two years to recover its initial investment. With The shortest payback period, the company will accept project B
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