p_eval04_l9_comp

p_eval04_l9_comp - 1.011Project Evaluation: Comparing Costs...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1.011Project Evaluation: Comparing Costs & Benefits Carl D. Martland Basic Question: Are the future benefits large enough to justify the costs of the project? Present, Future, and Annual Worth Internal & External Rates of Return What Is a Project? For the planner (dreamer?): A vision, a dream or a hope A monument A way to solve a problem For the construction company: A specific task to be completed within a specific time A way to make money through construction For the owner: Potential benefits over the life of the project A way to make money through operation A monument For others: Potential improvement in opportunities, environment, etc Potential disruptions and degradation in environment How Do We Justify a Project? Is this project worthwhile? Are the benefits greater than the costs? Are MY benefits greater than MY costs? Is this the best way to achieve these benefits (either engineering & institutional options)? Can similar benefits be achieved more efficiently by some other approach? Is this the best place to allocate resources? Do other projects have greater payoff? Are other types of benefits more important? Cash Flow of a Typical CEE Project Year-40-30-20-10 10 20 30 40 50 Millions of Dollars Evaluating a Time Stream of Monetary Costs & Benefits Key concepts: Time value of money Risk vs. required return Present Worth (= Net Present Value) Equivalence (for PW, FW, and AW) Project Life Present Worth (Net Present Value) The "Present Worth" of a project is commonly referred to as its "Net Present Value". The NPV for the project is obtained by summing the discounted benefits for each year (using a discount rate i = MARR): NPV of Project = PW = [(B t- C t )/(1+i) t ] We know that this NPV can be transformed into an equivalent annual or future worth. Reduce all costs and benefits to time 0 Compute the equivalent time stream of costs and benefits over the life of the project using standard formulas or spreadsheet commands: Use equations, tables or spreadsheet functions to calculate equivalent annuities (AW or "Equivalent Uniform Annual Benefits") or FW Be careful whether cash flows occur at the beginning or the end of the period (Annuities are generally assumed to be received at the END of the period) Equivalent PW, AW, and FW Meaning of NPV NPV > 0, using a discount rate of i% This project is better than making an investment at i% per year for the life of the project This project is worth further consideration NPV < 0, using a discount rate of i% This project does not provide enough financial benefits to justify investment, since alternative investments are available that will earn i% (that is what is meant by "Minimum Acceptable Rate of Return" ) The project will need additional, possibly non-cash benefits to be justified Importance of the Discount Rate Very low rates favor large projects with distant benefits Using very low discount rates may lead a country to undertake massive projects while...
View Full Document

Page1 / 29

p_eval04_l9_comp - 1.011Project Evaluation: Comparing Costs...

This preview shows document pages 1 - 10. Sign up to view the full document.

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