1 / 19

Understanding Economic Feasibility Methods and Cash Flow Analysis

Learn about methods like Present Worth, Internal Rate of Return, Savings/Investment Ratio, and more to determine the economic feasibility of projects. Explore cash flow breakdown examples and calculations for Present Worth and Annual Worth. Discover when an alternative is economically feasible based on key indicators.

raven-larsen
Download Presentation

Understanding Economic Feasibility Methods and Cash Flow Analysis

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. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CTC 475 Review • Is a certain cash flow economically feasible?

  2. CTC 475 Methods for Determining if an Alternative is Economically Feasible

  3. Objectives • Know the various methods for determining if an alternative is economically feasible • Be able to use any method for economic feasibility studies

  4. Methods for Economic Feasibility Studies • Present Worth (PW) • Annual Worth (AW) • Future Worth (FW) • Internal Rate of Return (IRR) • External Rate of Return (ERR) • Savings/Investment Ratio (SIR) or • Benefit/Cost Ratio (B/C) • Payback Period Method (PBP) • Capitalized Worth Method (CW)

  5. Equivalent Methods • PW • AW • FW • IRR • ERR • SIR or B/C

  6. Nonequivalent Methods • PBP • CW

  7. When is an alternative feasible? • PW > 0 • AW > 0 • FW > 0 • IRR > MARR • ERR > MARR • SIR or B/C > 1

  8. Net Cash Flows • It’s a good idea to use net cash flows (one cash flow at each period). • It doesn’t matter with respect to whether a project is feasible or not; however, absolute numbers (ERR and SIR) may differ

  9. Example (MARR=10%)

  10. Cash flow breakdown • Years 1-4: Uniform ($5K) + Gradient ($3K) • n=4 • P will occur at t=0 • F will occur at t=4 • Years 5-8: Uniform ($14K) - Gradient ($3K) • n=4 • P will occur at t=4 • F will occur at t=8

  11. Present Worth • PW= -40K+5K(P/A10,4)+3K(P/G10,4) +[14K(P/A10,4)- 3K(P/G10,4)](P/F10,4) • PW= -40K+5K(3.1699)+3K(4.3781) +[14K(3.1699)-3K(4.3781)]*0.6830 • PW= +$10,324 • PW>0 ; therefore, cash flow is economically feasible

  12. Annual Worth • Find A given P • AW=PW(A/P10,8) • AW=$10,324(.1874) • AW=$1,935 • AW>0; therefore, cash flow is economically feasible

  13. Future Worth • FW=PW(F/P10,8) or PW(1.1)8 • FW=$10,324(2.1436) • FW=$22,130 OR • FW= AW(F/A10,8) • FW=$1,935(11.4359) • FW=$22,128 • FW>0; therefore, cash flow is economically feasible

  14. Future Worth-Alternate Method • FW= -40K(F/P10,8)+[5K+3K(A/G10,4)](F/A10,4)(F/P10,4) +[14K-3K(A/G10,4)](F/A10,4) • FW=-$85,744+($9,144)(6.7949)+($9,856)(4.6410) • FW=+$22,129

  15. IRR-Find i that gives a PW=0 • PW= -40K+5K(P/Ai,4)+3K(P/Gi,4) +[14K(P/Ai,4)- 3K(P/Gi,4)](P/Fi,4) Interpolate to get an IRR = 16.5% IRR>MARR

  16. ERR: Set FW of + using MARR = FW of – using ERR; solve for ERR • FW(+) = 5K+3K(A/G10,4)](F/A10,4)(F/P10,4) +[14K-3K(A/G10,4)](F/A10,4) = $107,873 • FW(-) = 40K(1+ERR)8 • 40K(1+ERR)8 = $107,873 • (1+ERR)8 = 2.6968 • ERR=13.2% • ERR>MARR • Check: MARR=10%; ERR=13.2%; IRR=16.5%

  17. SIR or B/C • SIR=PW(+)/PW(-) • PW(+)=5K(P/A10,4)+3K(P/G10,4) +[14K(P/A10,4)- 3K(P/G10,4)](P/F10,4)=$50,324 • SIR=$50,324/$40,000=1.26 • SIR>1

  18. PBP-Payback Period • If MARR=0 how many periods does it take to get your investment back? • At 1 year; $5K<$40K • At 2 years: $13K<$40K • At 3 years: $24K<$40K • At 4 years: $38K<$40K • At 5 years: $52K>$40K • PBP is 5 years

  19. Next lecture • Bonds

More Related