MIT1_040s09_lec14

MIT1_040s09_lec14 - MIT OpenCourseWare http:/ocw.mit.edu...

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

View Full Document Right Arrow Icon
MIT OpenCourseWare http://ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms .
Background image of page 1

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

View Full DocumentRight Arrow Icon
Project Financial Evaluation Massood Samii, Ph.D. WWW.samii.Info Blog: www.msamii.wordpress.com
Background image of page 2
Value Creation The main objective of project is creation of value for its stakeholders. Value is created financially by creating net cash flow socially by creating social benefit. The private sector main objective is value creation for their owners (stock holders). This is in terms of wealth maximization. The public sector attempts to maximize social benefits. Value creation is the guiding principle through out this discussion. That is any project must be able to create value
Background image of page 3

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

View Full DocumentRight Arrow Icon
Explicit and Implicit Cost In accounting all the costs and revenues are explicit, in finance and economics, they are both explicit and implicit. Explicit cost are the accounting costs that are realized. For example, labor cost, energy costs, and material. Implicit costs are those costs that are hidden. One such a cost is the difference between revenue and revenue from best alternative investment . For example if we make A amount of investment and we receive X amount of return but an alternative investment would create Y return, where Y>X, from economic point of view there is a loss equal to Δ = Y-X. In accounting term there is a profit of Y.
Background image of page 4
Explicit and Implicit, Continued Social cost –benefit analysis centers on the difference between explicit and implicit cost. Social cost are costs that are incurred by society. A firm maybe dumping wastes into a river. From firm’s point of view there is zero cost associated with waste disposal. However, the social cost of firms operation (from society point of view) is very high since they either have to clean water (a cost for the society) or have polluted water. Social benefits maybe also different that private benefit.
Background image of page 5

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

View Full DocumentRight Arrow Icon
Time Value of Money One important implicit cost is the time value of money. Accounting statements such as Balance Sheet and Income Statement do not take this factor into account. Time value of money simply suggest that there is a cost associated with holding cash. The cost is the interest rate that one could get from putting the fund in a saving account (time deposit) that has zero risk. This concept plays a central role in our discussion and analysis Example: Assume interest rate (risk free) is 8% per year, and that we have $100. If we put the money in interest baring deposited, by the end of the year we would have 100*(1.08)= 108 If we do not put the money in interest baring instrument and keep it as cash, while in accounting term we have no cost , we have had $8 as economic cost (opportunity cost) In our example, the Future value of $100 @8% annual interest rate is 108 at the end of the year Alternatively, $108 of one year in future would have a present value of 108/(1.08)= 100
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 11/29/2011 for the course CIVIL 1.018j taught by Professor Markusbuehler during the Fall '08 term at MIT.

Page1 / 32

MIT1_040s09_lec14 - MIT OpenCourseWare http:/ocw.mit.edu...

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