Lecture06

# Lecture06 - Lecture 6 Project Evaluation Competing Projects...

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Unformatted text preview: Lecture 6 Project Evaluation: Competing Projects IRR Method Continuing Value 2 Evaluation of Competing Projects Through NPV r Comparing projects with different lives r Optimal replacement decisions 3 Comparing Projects with Different Lives (Annual equivalent or per year NPV) r After you graduate from UQ, you find yourself in charge of the financial management at Werribee Safari Park r The trustees ask you to make a recommendation on the purchase of a safari minibus, which will be replaced indefinitely 4 Comparing Projects with Different Lives r You are considering two vehicles: c Vehicle A has an NPV of \$3,500 over a 5-year period c Vehicle B has an NPV of \$5,000 over a 7-year period r What are you going to recommend to the trustees? c Assume a required rate of return of 6% p.a. 5 Comparing Projects with Different Lives r Must compare projects over the same time frame r So, we compare the annual equivalent (AE), or the annual annuity with the same NPV ( ) 89 . 830 06 . 06 . 1 1 500 , 3 =- =- 5 A A E Comparing Projects with Different Lives ( ) 68 . 895 06 . 06 . 1 1 000 , 5 =- =- 7 B A E r Therefore, recommend Vehicle B. 5 5 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 8 9 5 .6 8 3 5 3 5 3 5 1 2 3 4 5 6 7 8 9 10 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 8 3 .8 9 Project B’s –cash flows Project A’s –cash flows 7 Comparing Projects with Different Lives r Principle: When evaluating competing machines that will be replaced indefinitely, choose the...
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Lecture06 - Lecture 6 Project Evaluation Competing Projects...

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