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

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McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 6 – Project Evaluation Criteria Section 1: Introduction “How do you make a million? You start with $900 000.” , Stephen Lewis Section 2: Investment Criteria – How do we judge whether a project is onomically justified? Cash Flow – A formal definition economically justified? Non-discounted cash flow criteria Total Cash Flow ccounting Rate of Return Accounting Rate of Return Payback Period Discounted cash flow criteria iscounted Payback Period Discounted Payback Period Net Present Value Present Value Ratio (Profitability Index) Equivalent Annual Value q Benefit-Cost Ratio Internal Rate of Return Project ranking 1 Section 3: Examples
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Introduction Aspects to be considered in project evaluation and capital budgeting decisions: enefits and costs occur over time Benefits and costs occur over time • Only cash items should be considered (no deferred income or expenses) • Decisions are generally irreversible • 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) he selection of projects is based on the objective of maximisation of • Estimates are uncertain; therefore, there is economic risk associated The selection of projects is based on the objective of maximisation of investor wealth 2 with undertaking capital investments
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Introduction 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, •T h e y 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 3 such as sustainability, pollution and education
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McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 6 – Project Evaluation Criteria Section 1: Introduction Section 2: Investment Criteria – How do we judge whether a project is onomically justified? Cash Flow – A formal definition economically justified? Non-discounted cash flow criteria Total Cash Flow Accounting Rate of Return g 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 4 Section 3: Examples
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Cash Flow Cash Flow DCF evaluation techniques are based on the concept of cash flow (CF) .
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This note was uploaded on 11/22/2010 for the course MIME MIME 310 taught by Professor Jassim during the Winter '09 term at McGill.

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

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