BU393 Chapter Notes - Chapter 10.4: Net Present Value, Cash Flow, Opportunity Cost
Document Summary
Include indirect cost: cost to a business that is not directly related to making the product or service. Included opportunity cost: the full cost of a choice. It is the value of the best forsaken alternative. Consider externalities: the cost (or benefit) that accrues to a 3rd person who is not a direct party to a transaction. Depreciation and interest is not included in cash flow analysis. 2 project approach: replacement chain approach: repeating each project until a common length is achieved and then comparing the npvs of the 2 streams of cash flows, equivalent annual annuity (eaa): essentially the npv per year. It is an annual dollar amount (for each year of a project"s life) that has a present value = to the project"s npv. Problems when correcting unequal lives: replacement jobs may not be available, as assumed by both methods, estimating cash flows are compounded when we assume the cash flows will repeat.
