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Managing Project Interactions and Investment Options

Understand various project interactions like erosion, enhancement, contingent, and mutually exclusive projects. Learn about present value of an annuity, inflation in capital budgeting, and investment options. Gain insights into evaluating future choices and options associated with projects.

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Managing Project Interactions and Investment Options

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  1. PROJECT INTERACTIONS • Erosion e.g., diet and regular soft drinks • Enhancement e.g., “The Lion King” & merchandising • Contingent Projects e.g., need road to develop mine • Mutually Exclusive Projects e.g., replacement equipment

  2. PRESENT VALUE OF AN ANNUITY

  3. ANNUITY PV (CONT.) • Given annuity PMT, r and n, we can find PV • Given annuity PV, r and n, we can find PMT • EAC technique converts an uneven stream into an annuity with same PV

  4. INFLATION & CAPITAL BUDGETING

  5. INFLATION & CAP. BUD. (cont.) • To calculate NPV with inflation: • Discount nominal cash flows at nominal discount rate OR • Discount real cash flows at real discount rate • Watch out for depreciation tax shields

  6. INVESTMENT OPTIONS • Be aware of future choices (options) that might be associated with projects - these can add to the value of the project • Future investment options • Abandonment option • Postponement option

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