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Midterm 1 Review Package.docx From Chapters 1 to 5

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University of Ottawa
Claude Théorêt

Benedict Wong ECO1192 Midterm 1 Review Package Topic 1: Introduction • Economics: The study of the choices made by individuals, businesses, governments, and societies to cope with scarcity and efficiency • Efficiency: Must produce goods and services that are MOST VALUED by society at MAXIMUM efficiency • Accounting cost: focuses on cash flows • Economic cost: has intangibles, focuses on cost with no cash flow o Eg. A project could be acceptable to society if the value of the goods and services exceeds the economic cost of producing them • Explicit Cost: Cost paid in money • Implicit cost: Cost incurred in a decision made • Economic Profit: total revenue –total economic/opportunity cost • MARR: Minimum Acceptable Rate of Return • Project Analysis o Financial: Focuses on cash inflows (NPW, NFW, AEW, IRR, ERR)  Cash flow has HIGHER priority over decision making  Simple and easy to calculate, Readily available cash flows  Wrong decisions can be made if intangible information is missing (eg. Time)  Harder to explain a project selection since it may be valued differently to another person  Value of non-cash flow information will vary by decision maker o Economic: Measures the impact of a project’s benefits and costs on a target population’s well-being. All tangible and intangible impacts on the value of goods and services/resources mush be identified and quantified  Analysis MUST focus on societal impact of project  Disagreement may occur over the values of intangibles (eg. life) Topic 2: Time Value Mechanics • Valid or acceptable project: Cash inflows must exceed cash outflows • Projects would be equivalent if their economic effects are identical • Interest Rate: Measure of the importance of time in economic analysis o Discrete Interest Rates  Nominal (Quantitative)  Effective (Qualitative): (1+r/m)^m -1  Actual (Nominal Rate within year periods) Effective/Period o Continuous Interest Rates  Effective Rate (e^r-1)  Actual Rate 0 • Cash flows o Single Sums (Present Worth or Future Worth) o Annuities o Linear Gradient Series o Geometric gradient series o Irregular series • (P/F, i%, N): Find the Present value given the future value, interest rate, and period • (F/P, i%, N): Find the Future value given the present value, interest rate, and period • (A/P, i%, N): Find the Annuity given the present value, interest rate, and period • (A/F, i%, N): F
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