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

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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 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
Background image of page 2
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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 4
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 = Inflows of cash - Outflows of cash (per period of time) Inflow (benefits) Outflows (costs) Cash Flow • Sales (or reduction in costs, i.e. benefits) • Disposal of assets • Capital Expenditures • Operating Expenses • Tax Payments • Rehabilitation expenditures
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 McGill Faculty of Engineering MIME 310
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/15/2011 for the course MIME 310 taught by Professor Bilido during the Fall '08 term at McGill.

Page1 / 69

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

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online