Present value analysis

A present-value analysis that contains such uncertain factors generally requires a little ingenuity in assessing the full merits of an engineering project. 

The definition of net cash flow (NCF) for capital budgeting purposes is after tax cash flows from operations discounted at the present value of the cost of capital.26 In net present value analysis the cost of capital is a pre determined value based on the opportunity cost of capital. The cost of capital is defined as a weighted average cost of capital (WACC) and takes into account the firm s capital structure, the cost of equity and debt capital, and tax rates. The formula for the weighted average cost of capital (WACC) is... 

By net present value analysis the cash flow CF earned in different years n is brought to the present value CF by using a compound-interest formula ... 

With a market interest rate of 15% and a general inflation rate of 5%, the inflation-free rate is 9.52%. This leads to a net present value of 63,480.63, which is equivalent to the actual doUar analysis (within rounding error). This is expected because all of the component cash flows were inflated at the same rate. As noted in the before-tax analysis, if the component inflation rates differ, then there may be a discrepancy in the final net present value analysis because the conversion from a market rate to an inflation-free rate (or vice versa) requires a single inflation rate. 

The measurements of net profit, cash flow, and ROI tell the manager whether a firm is making money and what its relative performance is. Obviously when managers need to make decisions in the course of daily business, they will try to increase profit, cash flow, and ROI. But, it is not always immediately obvious in many decisions which alternative will maximize this return. The break-even analysis and present value analysis do provide information about investments, but they do not provide insight into decisions about how to schedule the equipment and which orders to accept given certain capacity constraints. 

Example 3 Sensitivity Analysis The following data describe a project. Revenue from annual sales and total annual expense over a 10-year period are given in the first three columns of Table 9-5. The fixed-capital investment Cfc is 1 million. Plant items have a zero salvage value. Working capital C c is 90,000, and the cost of land Ci is 10,000. There are no tax allowances other than depreciation i.e., is zero. The fractional tax rate t is 0.50. For this project, the net present value for a 10 percent discount factor and straight-line depreciation was shown to be 276,210 and the discoiinted-cash-flow rate of return to be 16.4 percent per year. 

Strained set of lattice parameters and calculating the stress from the peak shifts, taking into account the angle of the detected sets of planes relative to the surface (see discussion above). If the assumed unstrained lattice parameters are incorrect not all peaks will give the same values. It should be borne in mind that, because of stoichiometry or impurity effects, modified surface films often have unstrained lattice parameters that are different from the same materials in the bulk form. In addition, thin film mechanical properties (Young s modulus and Poisson ratio) can differ from those of bulk materials. Where pronounced texture and stress are present simultaneously analysis can be particularly difficult. 

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. 

The predicted strengths in Figure 4-44 are generally somewhat above the measured values. The predicted and observed stiffnesses, both initial (below the knee) and final, are in very good agreement. Thus, the stiffness aspects of classical lamination theory, as well as the present strength-analysis procedure, are verified. 

Capital investment decisions are best made within the context of a life-cycle cost analysis. Life-cycle cost analysis focuses on the costs incurred over the life of the investment, assuming only candidate investments are considered that meet minimally acceptable performance standards in terms of the non-inonetary impacts of the investment. Using life-cycle analysis, the capital investment decision takes into account not just the initial acquisition or purchase cost, but maintenance, energy use, the expected life of the investment, and the opportunity cost of capital. When revenue considerations are prominent, an alternative method of analysis such as net benefit or net present value may be preferred. 

In this paper, we have not concerned ourselves with the differing behavior of various alkyl groups, but have instead for the present considered the methyl substituent as roughly representative of the behavior of most alkyl group substituent effects. The present results make possible (through use of p/and pji values) analysis of reported substituent effects of various alkyl groups. Such an analysis is beyond the scope of this paper, however. 

A real discount rate of 10% was used to convert all future expenses and savings into current dollars. This allowed calculation of the net present value of the savings and costs. Also calculated were the discounted payback period and the simple payback period. Each of these quantities was calculated over a life cycle analysis period of 20 years, the assumed life of the mechanical system. Maintenance costs were considered to remain constant in real terms. 

Economic analysis can determine the discounted profitability criteria in terms of payback period (PBP), net present value (NPV), and rate of return (ROR) from discounted cash flow diagram, in which each of the annual cash flow is discounted to time zero for the LHS system. PBP is the time required, after the construction, to recover the fixed capital investment. NPV shows the cumulative discounted cash value at the end of useful life. Positive values of NPV and shorter PBP are preferred. ROR is the interest rate at which all the cash flows must be discounted to obtain zero NPV. If ROR is greater than the internal discount rate, then the LHS system is considered feasible (Turton et al., 2003). 

Table II. Net Present Value - Discounted Cash Flow Analysis...

Chapter 3 treats the most common type of objective function, the cost or revenue function. Historically, the majority of optimization applications have involved trade-offs between capital costs and operating costs. The nature of the trade-off depends on a number of assumptions such as the desired rate of return on investment, service life, depreciation method, and so on. While an objective function based on net present value is preferred for the purposes of optimization, discounted cash flow based on spreadsheet analysis can be employed as well. 

So far we have explained how to estimate capital and operating costs. In Example 3.3, we formulated an objective function for economic evaluation and discovered that although the revenues and operating costs occur in the future, most capital costs are incurred at the beginning of a project. How can these two classes of costs be evaluated fairly The economic analysis of projects that incur income and expense over time should include the concept of the time value of money. This concept means that a unit of money (dollar, yen, euro, etc.) on hand now is worth more than the same unit of money in the future. Why Because 1000 invested today can earn additional dollars in other words, the value of 1000 received in the future will be less than the present value of 1000. 

Inflation can be a significant factor in analysis of profitability. High inflation rates frequently occur in many countries. In computing the rate of return or net present value, you need to obtain a measure of profitability that is independent of the inflation rate. If you inflate projections of future annual income, the computed rate of return may largely result from the effects of inflation. Most companies strive for an internal rate of return (after taxes) of 10-20 percent in the absence of inflation ... 

Griest (1979) has discussed the effects of inflation on profitability analysis and has pointed out that the percentage change in profits after income taxes rarely increases at the rate of inflation, largely due to the effects of taxation. Assumptions about inflation can change the relative ranking of project alternatives based on net present value special techniques based on probability may be required because inflation is difficult to predict. 

In the drying of materials such as wood or clay, the moisture concentration at the end of the constant rate period is not uniform, and is more nearly parabolic. Sherwood has presented an analysis for this case, and has given experimental values for the drying of brick clay. 

It is important to remember that lipid oxidation is a dynamic process and that TBARS values reflect only one point in this process. The concentration of TBARS for meat tends to increase over the storage period, reach a maximum value, and then decline. When an unknown sample is presented for analysis, caution must be exercised as the sample s placement on this curve is unknown. 

Without any changes to the production network, the operating cash flows and the NPV of the network would be reduced by approximately 10% in comparison to the baseline values. However, by re-allocating production volumes within existing capacities, it is possible to restore previously earned operating cash flows. To do so, production volumes are shifted to the major site A, which is located in the Euro zone. Contrarily, site C, which is located in the USA, would not be utilized at all by the product groups included in the example. It should be noted that this does not imply a closure of the US site since only a subset of the product portfolio was included in the analysis. The net present value of the network is nevertheless affected by the US appreciation because of the restructuring costs associated with the re-allocation of production volumes. 

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