Ch_7_Estimating_Cash_Flows_and_Gathering_Information

Ch_7_Estimating_Cash_Flows_and_Gathering_Information -...

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1 Estimating Cash Flows and Gathering Information IE 226 IE 226 2 Economic Decision Process Economic Decision Process 1 Problem (need or opportunity) Recognition and Definition 2 Generation of Solution Alternatives 3 Development of Feasible Solution Alternative Cash Flows 4 Economic Evaluation of Alternatives, including cases under uncertainty and risk 5 Selection and Implementation of Best Alternative 6 Post-implementation Analysis and Evaluation
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3 Step 3 Step 3 Defined Problem Generated Solutions (Reduced to Feasible Set) Now: Gather Relevant Information Estimate Cash Flows Estimate Length of Project Gather Non-economic/quantifiable information Estimate necessary probabilities • e.g. low, medium, high chances, etc. 4 What to Estimate? What to Estimate? Estimates should cover the life-cycle of the decision Initial costs (acquisition and development) • Referred to as the Development phase Costs and revenues from operations • Referred to as the Operational phase Salvage costs and revenues from disposal • Referred to as the Disposal phase
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5 Common Investment Common Investment Revenues ( A ) Salvage Value ( F ) Operating and Maintenance (O&M) Costs P 0n 12 Investment 6 Initial (Investment) Cash Flows These are generally one-time costs Purchase Cost Closing Costs/Fees Taxes Transportation/Delivery Installation Licenses
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7 Cash Flows from Operations Cash Flows from Operations These tend to be recurring/repeating cash flows Revenues from sales Maintenance (repair and preventative) Rental/Leasing Fees Overhead/Management Costs/Support Utilities, Energy, Fuel Raw Materials Labor (wages, salaries, benefits, bonuses, etc.) Taxes, Insurance 8 End (Salvage) Cash Flows End (Salvage) Cash Flows These also tend to be one time fees Removal Costs Shipping Scrap Waste Removal/Remediation Recycling revenue/Salvage Values Taxes/Credits on the Sale of Equipment
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9 How Accurate? How Accurate? Resources (Time and money spent on estimates) Error (Inaccuracy of the Estimate) Budgetary Order of Magnitude Definitive 10 Some Good News Some Good News Revenues ( A ) Salvage Value ( F ) O&M P 0N 12 The farther in the future something is, the harder to forecast, predict or estimate, but discounting helps! Initial costs occur in near term, easier to estimate.
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11 Some Good News Some Good News Revenues ( A ) Salvage Value ( F ) O&M P 0N 12 The farther in the future something is, the harder to forecast, predict or estimate, but discounting helps! Salvage costs hard to estimate, but not crucial. 12 Some Good News Some Good News Revenues ( A ) Salvage Value ( F ) O&M P The farther in the future something is, the harder to forecast, predict or estimate, but discounting helps! Revenues and O&M costs probably the hardest.
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13 Some Good News Some Good News Revenues ( A ) Salvage Value ( F ) O&M P 0N 12 Good news: costs that are harder to estimate (in the future) need not be so accurate, as discounting minimizes their effect in present dollars.
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Ch_7_Estimating_Cash_Flows_and_Gathering_Information -...

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