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OUTLINE

OUTLINE. Questions? News? Chapter 5 Go over old quiz. Example. MUTUALLY EXCLUSIVE ALTERNATIVES. IF ONE ALTERNATIVE IS SELECTED, ALL OTHERS ARE REJECTED “DO NOTHING’ IS AN ALTERNATIVE REVENUE PROJECT -- INCOME DEPENDS ON THE CHOICE OF THE ALTERNATIVE

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OUTLINE

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  1. OUTLINE • Questions? • News? • Chapter 5 • Go over old quiz

  2. Example

  3. MUTUALLY EXCLUSIVE ALTERNATIVES • IF ONE ALTERNATIVE IS SELECTED, ALL OTHERS ARE REJECTED • “DO NOTHING’ IS AN ALTERNATIVE • REVENUE PROJECT -- INCOME DEPENDS ON THE CHOICE OF THE ALTERNATIVE • SERVICE PROJECT -- REVENUES ARE THE SAME REGARDLESS OF THE CHOICE OF ALTERNATIVE

  4. PROJECT LIVES • ANALYSIS PERIOD, STUDY PERIOD OR PLANNING HORIZON: • TIME PERIOD OVER WHICH THE IMPACT OF THE PROJECT WILL BE EVALUATED • WE HAVE TO CONSIDER: • REQUIRED SERVICE PERIOD • USEFUL LIFE OF THE PROJECT • FOR MULTIPLE PROJECTS WE MUST COMPARE THEM OVER AN EQUAL TIME SPAN

  5. PROJECT LIVES (CONTINUED) • EXAMPLES • PROJECT LIVES LONGER THAN ANALYSIS PERIOD (5.11) • PROJECT LIVES SHORTER THAN ANALYSIS PERIOD (5.10) • ANALYSIS PERIOD = LONGEST LIFE (5.12) • UNEQUAL LIVES - LOWEST COMMON MULTIPLE METHOD (5.13)

  6. Example 5.11 – Project lives longer than the analysis period • THIS ONE IS VERY STRAIGHT FORWARD: • WE ANALYZE FOR THE LENGTH OF TIME THAT WE ARE INTERESTED IN. WHATEVER THE EQUIPMENT IS WORTH AT THE END OF THE ANALYSIS PERIOD, WE CONSIDER AS SALVAGE VALUE

  7. Example 5.10 Project lives shorter than analysis period • THIS EXAMPLE HAS TWO OPTIONS, ONE THAT WILL LAST 3 YEARS, THE OTHER 4. UNFORTUNATELY WE HAVE TO PLAN FOR 5 YEARS. • WE HAVE TO CHOOSE AN APPROACH THAT WILL FILL IN THE LAST TWO YEARS OF THE FIRST OPTION, AND THE LAST YEAR OF THE SECOND OPTION

  8. Example 5.12 Analysis period = longest life

  9. Example 5.13 Unequal lives - lowest common multiple method • Option A has a life of 3 years, Option B 4 years. • We use a lowest common denominator (12) as the analysis period • For each option we calculate NPV and the end of its life and then repeat the investment until we have reached the common denominator

  10. A FUN NOTE TO END ON (GARY LARSEN) “Notice all the computation, theoretical scribbling, and lab equipment, Norm … Yes, curiosity killed these cats

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