Lecture_10_ - 2-1Lecture#10•Equivalent Annual...

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Unformatted text preview: 2-1Lecture#10•Equivalent Annual Costs•Real Options and Capital budgeting•Decision Trees2-2Equivalent Annual Cost Analysis•How to Choose between two mutually exclusive projects if the projects have to be replaced periodically?•What if the projects have different life span?•How to find which project is more economical to use?•Use _________2-3Example: Equivalent Annual Cost Analysis•Two types of batteries are being considered for use in electric golf carts at City Country Club. –Burnout brandbatteries cost $36, have a useful life of 3 years, will cost $100 per year to keep charged, and have a salvage value of $5. SL depreciation to 0.–Longlasting brandbatteries cost $60 each, have a life of 5 years, will cost $88 per year to keep charged, and have a salvage value of $5. SL depreciation to 0.•Q:Which type is more economical to use? (Tax=34%)•A:2-4Example: Equivalent Annual Cost Analysis•Using the tax shieldapproach, cash flows for Burnout are:OCF = Sales – Cost *(1-TC)+ Dep * TCOperatingCapitalTotalYearcash flow- spending= cash flow1232-5Example: Equivalent Annual Cost Analysis (continued)•OCFs for Longlasting are:OCF = Operating CapitalTotalYearOCF- spending = cash flow123452-6Example: Equivalent Annual Cost Analysis•Using a 15% required return, calculate the cost per year for the two batteries.•Calculate the PV of the cash flows:The present value of total cash flows for Burnout is __________The present value of total cash flows for Longlasting is ______2-7Example: Equivalent Annual Cost AnalysisWhat 3 year annuity has the same PV as Burnout?...
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This note was uploaded on 07/04/2011 for the course FINA 463 taught by Professor Tsyplakov during the Fall '10 term at South Carolina.

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Lecture_10_ - 2-1Lecture#10•Equivalent Annual...

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