MIME 310 - Chapter 6

MIME 310 - Chapter 6 - McGill Faculty of Engineering MIME...

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1 McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: Investment Criteria – How do we judge whether a project is economically justified? Non-discounted cash flow criteria ± Total Cash Flow ± Accounting Rate of Return ± Payback Period Discounted cash flow criteria ± Discounted Payback Period ± Net Present Value ± Present Value Ratio (Profitability Index) ± Equivalent Annual Value ± Benefit-Cost Ratio ± Internal Rate of Return Project ranking Chapter 6 – Project Evaluation Criteria Section 1: Introduction Cash Flow – A formal definition Section 3: Examples “How do you make a million? You start with $900 000.” , Stephen Lewis
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2 McGill Faculty of Engineering MIME 310 Engineering Economy Aspects to be considered in project evaluation and capital budgeting decisions: • Benefits and costs occur over time • Only cash items should be considered (no deferred income or expenses) • Decisions are generally irreversible • Estimates are uncertain; therefore, there is economic risk associated with undertaking capital investments • There is a need for a minimum acceptable return on investment to guarantee the creation of wealth ± Cost of capital ± Opportunity cost of money (alternate consideration) • The selection of projects is based on the objective of maximisation of investor wealth Section 1: Introduction
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3 McGill Faculty of Engineering MIME 310 Engineering Economy The overall objective of an investor may be stated as follows: Accumulate as much wealth as possible, as rapidly as possible, using the least amount of capital as possible, obtained from the lowest cost sources as possible. Discounted Cash Flow (DCF) methods are evaluation techniques that recognize these aspects. However, • They cannot deal with non-monetary aspects • The emphasis is placed on short-term costs and/or benefits. .. this presents difficulties when dealing with long-term issues such as sustainability, pollution and education Section 1: Introduction
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4 McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: Investment Criteria – How do we judge whether a project is economically justified? Non-discounted cash flow criteria ± Total Cash Flow ± Accounting Rate of Return ± Payback Period Discounted cash flow criteria ± Discounted Payback Period ± Net Present Value ± Present Value Ratio (Profitability Index) ± Equivalent Annual Value ± Benefit-Cost Ratio ± Internal Rate of Return Project ranking Section 1: Introduction Cash Flow – A formal definition Section 3: Examples 3 Chapter 6 – Project Evaluation Criteria
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5 McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Cash Flow DCF evaluation techniques are based on the concept of cash flow (CF) .
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MIME 310 - Chapter 6 - McGill Faculty of Engineering MIME...

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