ECON
Chapter 14 (1).pptx

# Discounting all cash flows at marr 25 pw alpha 436000

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Discounting all cash flows at MARR = 25%, PW (Alpha) = \$436,000, PW (Beta) = \$441,000 Example 14-4 R\$ Analysis versus A\$ Analysis

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14-14 R\$ Analysis versus A\$ Analysis A new heat exchanger will cost \$220,000, saves \$50,000/yr After 10 years, no salvage value. Real interest rate = 15%; inflation = 5%. Is this project worth doing? Analyze in A\$ and R\$. Copyright Oxford University Press 2017 i = i + f +( i )( f ) = 0.15 + 0.05 + (0.15)(0.05) = 0.2075 Both approaches yield the same result
14-15 Price Change with Indexes Price Indexes describe relative price fluctuations of goods and services Price Indexes track a specific commodity or bundles of commodities We use past price changes to predict future prices All price indexes have a “base year”, assigned a value of 100 Copyright Oxford University Press 2017

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14-16 Price Changes in Postage (Fictitious) Letter Cost Index describes relative price fluctuation of sending a first- class letter in the U.S. Base year = 1970. LCI 1970 = 100 (14-2) Copyright Oxford University Press 2017
14-17 Price Change with Indexes Annual percentage increase (14-3) % change in LCI from 2012 - 2013 Copyright Oxford University Press 2017

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14-18 Example 14-6 Price Change with Indexes A new building in L.A. cost was \$52.5M in 2016. How much will a similar cost in 2018? California Construction Cost Index CCCI 2000 = 3746 CCCI 2016 = 6106 F = P (1 + f ) n F = 6106, P = 3746, n = 16 f = (6106/3746) 1/16 – 1 = 3.10% per year for 2018, F = 52.5M x 1.0310 2 = \$55.8 million in 2018 Copyright Oxford University Press 2017
14-19 Composite Cost Index: Consumer Price Index (CPI) CPI Inflation Rates (%) Copyright Oxford University Press 2017

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14-20 The average annual CPI was 218.4 in 2010, and 237.0 in 2015. What is the CPI inflation rate over this period? A. 8.5% B. 7.8% C. 8.2% D. I don’t know Copyright Oxford University Press 2017
14-21 Example 14-7 Copyright Oxford University Press 2017 Develop utility cost estimate for new facility.

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