Cash outlays present value

Now that you have determined the likely savings in terms of annual process and waste-treatment operating costs associated with each option, consider the necessary investment required to implement each option. Investment can be assessed by looking at the payback period for each option that is, the time taken for a project to recover its financial outlay. A more detailed investment analysis may involve an assessment of the internal rate of return (IRR) and net present value (NPV) of the investment based on discounted cash flows. An analysis of investment risk allows you to rank the options identified. 

A widely used method of analysis Is that based upon the Internal rate of return. Also known as the Discounted Cash Flow method, this approach Is based on the criterion that the sum of the present value of all cash flow returns associated with a given project be equal to the Initial Investment outlay namely,... 

There is only one way to get information on both the amount and timing of cash outlays required to produce a successful NCE take a large and representative sample of R D projects and, for each project, record incurred costs month-by-month until the project is either abandoned or approved for marketing. Then, outlays over time can be converted to their present value in a particular reference year at the appropriate cost of capital. The present value of outlays per approved NCE is the average cost of bringing an NCE to market. 

The reported expenditures don t correspond exactly to cash outlays because charges for indirect costs, overhead, or capital equipment and facilities may be made using allocation or depreciation methods that don t correspond in time to actual cash outlays. The term cash costs is used here to differentiate the reported expenditures from their present values in the year of market approval. 

Life-cycle costing utilizes universally accepted accounting practices for determining the total cost of asset ownership or projects over the service life. The economic analysis is usually performed for comparing competing alternatives. Since the initial capital outlay, support, and maintenance over the service life and disposal costs are considered, the time value of money assumes major importance in life-cycle costing. Discounting future cash flows to present values essentially reduces all associated costs to a common point in time for objective comparison. 

Profitability index is related to NPV analysis. For simple projects that have an initial cash outlay followed by a series of cash inflows, profitability index is a good way to rank and choose projects when it is not possible to select all projects. Profitability index is the present value of the project s cash inflows divided by the project s initial cash outflow. 

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