Analysis of Independent Investments
a)project must pay back initial investment within certain number of years.
b) payback period
c) too simplistic
d) Discounted payback period- number of years recover initial investment using discounted cash
ﬂows. PresentWorth Criteria
a) minimum attractive rate of return
- rate of return that ﬁrm wishes to make on its investment
b) estimate economic life of project
c) estimate cash ﬂows in each period
d) ﬁnd present worth of each cash ﬂow given the MARR
e) If PW>0 accept project.If PW<0 reject project.
If FW>0 accept,otherwise reject.
Annual EquivalentWorth(AE orAW)
This is useful for annual reporting formats,unit costs,unequal project lives & replacement
Capital & Operating Costs
a) capital costs - incurred in purchasing assets used in production and service.
b) operating costs - incurred by operating of plant and equipment.