Term
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Definition
| when future returns are in the form of interest plus repayment of the principal. |
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Term
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Definition
| Representation of future earnings, along with the capital expenditures and annual expenses. |
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Term
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Definition
| Screens projects on the basis of how long it takes for net receipts to equal investment --> Payback period determined by adding the expected cash flows for each year until the sum is equal to, or greater than zero |
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Term
| Conventional payback method |
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Definition
| Ignoring time value of money in determining payback period |
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Term
| Discounted payback period |
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Definition
| Including the time value of money in determining payback period |
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Term
| Flaws of payback screening |
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Definition
- Fails to measure profitability
- Fails to recognize the difference between the present and future value of money (i.e. if PROJECT A had a first period earning of $1000 and second period earning of $3000 vs PROJECT B whose earning in period one was $3000 and $1000 in period 2. Project B would be the better choice because of the concept of time value of money; however payback screening does not account for this)
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Term
| Net-Present-Worth Criterion |
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Definition
1) Determine Interest Rate (MARR or Minimum attractive rate of return or required rate of return)
2) Estimate Service Life of Project
3) Estimate Cash INFLOW for each period over the service life
4) Estimate Cash OUTFLOW for each period over the service life
5) Determine the net cash flows for each period (net cash flow=cash inflow - cash outflow)
6) Find the present worth of each net cash flow at the MARR. Add up tehse present-worth figures; their sum is defined as the projects NPW |
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Term
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Definition
| Remainder of balance due once revenues are used to pay off principle and interest (in the case of a bank loan) |
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Term
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Definition
| Terminal balance at the end of the project life |
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Term
| Capitalization of project with perpetual planning horizon |
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Definition
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Term
Sample Capitalized-Equivalent Cost Problem
A) If $30,000 is deposited into an account today in order to accomadate maintenance costs at a sports complex, which amount to $3,500 a year (estimated), what interest rate is needed annually inorder for $30,000 to be sufficient at an infinite time down the road? |
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Definition
PW(i) = A/i
$30,000 = $3,500/i
30,000/3500 = i
i = 11.6%
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Term
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Definition
| Turbine plant vs Fuel Cell Plant - cost difference is in the initial purchase or investment. Revenue generated from customers is the same. PW in this case would call for the project with the lowest production costs over the life of the project in order to maximize profit. |
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Term
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Definition
| Revenue matters, in this both production and initial cost would be important as well as revenue generated. if PW is used we would select the model that promises to bring the largest net present worth. |
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Term
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Definition
| amount of money for which the equipment could be sold after its service to the project has been rendered, or the dollar measure of tis remaining usefulness |
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Term
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Definition
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Term
| Annual equivalent of a capital cost (capital recovery cost) |
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Definition
| CR(i) = (I-S)(A/P, i, n) + is |
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Term
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Definition
| PB(i)n = Pb(i)n-1(1+i)+An |
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Term
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Definition
| i = iL+(ih-il)*((Valueh)/(Valueh-Valuel)) |
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