slide1
Download
Skip this Video
Download Presentation
EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz

Loading in 2 Seconds...

play fullscreen
1 / 17

EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz - PowerPoint PPT Presentation


  • 101 Views
  • Uploaded on

Chapter 9 - Benefit-Cost Ratio and Other Analysis Methods Click here for Streaming Audio To Accompany Presentation (optional). EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz Industrial & Manufacturing Engineering Department Cal Poly Pomona. EGR 403 - The Big Picture.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz' - bunme


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

Chapter 9 - Benefit-Cost Ratio and Other Analysis MethodsClick here for Streaming Audio To Accompany Presentation (optional)

EGR 403 Capital Allocation Theory

Dr. Phillip R. Rosenkrantz

Industrial & Manufacturing Engineering Department

Cal Poly Pomona

egr 403 the big picture
EGR 403 - The Big Picture
  • Framework:Accounting& Breakeven Analysis
  • “Time-value of money” concepts - Ch. 3, 4
  • Analysis methods
    • Ch. 5 - Present Worth
    • Ch. 6 - Annual Worth
    • Ch. 7,7A,8 - Rate of Return (incremental analysis)
    • Ch. 9 - Benefit Cost Ratio & other methods
  • Refining the analysis
    • Ch. 10, 11 - Depreciation & Taxes
    • Ch. 12 - Replacement Analysis

EGR 403 - Cal Poly Pomona - SA12

chapter 9 other analysis methods
Chapter 9 - Other Analysis Methods
  • Future worth analysis
  • Benefit-cost ratio analysis
  • Payback period
  • Sensitivity and breakeven analysis

EGR 403 - Cal Poly Pomona - SA12

future worth analysis
Future Worth Analysis
  • Answers the question, what will the future situation be, if we take some particular course of action now?
    • Example 9.1, FW = P(F/P,i , n), FW = A(F/A, i, n)

EGR 403 - Cal Poly Pomona - SA12

future worth analysis1
Future Worth Analysis
  • When constructing a building, the issue is:
    • not the dollars out of pocket,
    • but the invested cost at start- up.
    • Example 9-2: The remodel project costs less out of pocket, but has a higher “up front” cost. That makes it less desirable.

EGR 403 - Cal Poly Pomona - SA12

benefit cost ratio analysis
Benefit-Cost Ratio Analysis

Example 9-3

  • If the PW of benefits - PW of costs ³ 0.

The alternative is considered acceptable.

  • Restated:

Benefit-cost ratio B/C =.

PW of benefit/PW of cost ³ 1.

  • Fixed input, maximize B/C.

EGR 403 - Cal Poly Pomona - SA12

benefit cost ratio analysis1
Benefit-Cost Ratio Analysis
  • If the EUAB - EUAC ³ 0.

The alternative is considered acceptable.

  • Restated:

Benefit-cost ratio: B/C = EUAB/EUAC ³ 1

Or, using PW: B/C = PWB/PWC ³ 1

  • Neither input or output fixed - use incremental B/C.
  • Note: Salvage Value is considered a “negative cost”, not a benefit
  • B/C Ratio Analysis is popular in government
  • Very easy to use with databases and spreadsheets

EGR 403 - Cal Poly Pomona - SA12

benefit cost ratio analysis example reject increment if incremental b c ratio is 1
Benefit Cost Ratio Analysis ExampleReject increment if incremental B/C Ratio is < 1

EGR 403 - Cal Poly Pomona - SA12

slide9
Benefit Cost Ratio Analysis ExampleFirst Increment is B-D. Incremental B/C > 1, so choose higher cost alternative

EGR 403 - Cal Poly Pomona - SA12

benefit cost ratio analysis example reject increment if incremental b c ratio is 11
Benefit Cost Ratio Analysis ExampleReject increment if incremental B/C Ratio is < 1

EGR 403 - Cal Poly Pomona - SA12

payback period important points
Payback Period: Important Points
  • Approximate economic analysis method.
  • Prior to payback the effect of timing is ignored.
  • After payback all economic consequences are ignored.
  • Will not necessarily produce a recommended alternative consistent with equivalent worth and rate of return methods.

EGR 403 - Cal Poly Pomona - SA12

payback period
Payback Period

9-6

  • The period of time required for the profit or other benefits of an investment to equal the cost of the investment.
  • How many years are required to get my money back?

EGR 403 - Cal Poly Pomona - SA12

payback analysis

What is wrong here?

    • Payback and IRR analysis do not agree.
Payback Analysis

Example 9-8

With alternative A we get our money back in 4 years but never make a return on the investment.

With alternative B we get our money back in 5 years and make a return on the investment of 19%.

  • How should we make a decision?
  • Liquidity vs. profitability.
  • Life of project.

EGR 403 - Cal Poly Pomona - SA12

sensitivity and break even analysis
Sensitivity and Break-even Analysis
  • Economic data represent projections of expenditures and returns.
  • These projections ultimately affect our decisions.
  • To more fully consider our choice of a decision, we should play a “what if” game to determine the amount of change in a data point that might change the decision.

EGR 403 - Cal Poly Pomona - SA12

consider problem 6 21
Consider Problem 6-21
  • Diesel engine is preferred based on values assumed.
  • How much would changes in assumptions have to be in order to change the preferred alternative?

EGR 403 - Cal Poly Pomona - SA12

how much would price of diesel fuel need to go up before gas would be the preferred alternative
How much would price of diesel fuel need to go up before Gas would be the preferred alternative?

Price of Diesel would have to go up to $.75 to change decision.

EGR 403 - Cal Poly Pomona - SA12

what is the impact of the variability of resale value on the analysis
What is the impact of the variability of resale value on the analysis?

By varying the resale value, we find that at about $4200 resale value for the gasoline powered vehicle the EUAC is almost equal

EGR 403 - Cal Poly Pomona - SA12

ad