Money saving advantage Analysis

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Slide 1

Money saving advantage Analysis

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Cost Benefit Analysis Identify & assess all expenses & benefits Discount Assess project(s) by figuring Benefit/Cost Ratio (B/C) Net Present Value (NPV) Internal Rate of Return (IRR)

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Evaluation Identification (what are they?) Evaluation (what are they worth?) Measurement issues: Direct & circuitous (i.e. externalities) impacts Tangible & immaterial impacts Pecuniary impacts

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Discounting Policies & extends keep going quite a while Frequently costs & benefits happen at various times Money has a period esteem, i.e. ceteris paribus , current dollars are more profitable than future dollars Thus, we have to place current & future expenses & benefits on an equivalent reason for examination

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Discounting, cont. This is finished by " marking down ," that is by diminishing future dollars to present esteem by applying a markdown (or a negative premium) rate

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Discount Rate v. Loan fee $100,000 contributed at a 3% financing cost today will be worth generally $115,927 in five years $100,000 in expected advantages quite a while from now is worth generally $86,260 today, when reduced by 3%

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The Discount Rate Matters $100,000 in foreseen benefits a long time from now is worth generally $86,260 today, when marked down by 3% $100,000 in expected advantages a long time from now is worth generally $78,352 today, when reduced by 5% The distinction becomes bigger as Multiple years are represented Benefits collect further into the future

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What To Use As A Discount Rate? There are different ways to deal with selecting one "Givens" (i.e. some power forces one) Bank loan costs Rates of profit for specific speculations (e.g. government securities) "Social" rebate rates

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Net Present Value The contrast between aggregate marked down advantages and aggregate reduced costs NPV = (PV B ‑ PV c ) NPV: choice criteria For a solitary venture, a positive NPV demonstrates agreeableness For different (contending) ventures, the project(s) with the most noteworthy NPVs ought to get most elevated need

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Benefit/Cost Ratio B/C = (PV B/PV C ) Benefit/Cost proportion: choice criteria For a solitary venture, a B/C proportion which is more prominent than 1 shows worthiness For numerous (contending) ventures, the project(s) with the most astounding B/C proportions (more prominent than 1) ought to get most noteworthy need

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Internal Rate of Return The markdown rate at which the present estimation of advantages is equivalent to the present estimation of costs Internal Rate of Return: choice criteria For a solitary venture, an IRR which is more noteworthy than the chose (for B/C or potentially NPV investigation) markdown rate shows adequacy For various (contending) ventures, the one with the biggest IRR is the most attractive

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NPV & B/C Comparison NPV measures sums , demonstrates the sum by which benefits surpass (or don't surpass) costs (add up to profit or misfortune) B/C measures the proportion (or rate) by which benefits do or don't surpass costs (proficiency)

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NPV & B/C Comparison, cont. They are unmistakably comparable, yet not indistinguishable With different activities, some may improve under NPV investigation, others under B/C

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Internal Rate of Return It has a specific fascination, additionally has a few issues The contention that an IRR which is more prominent than the chose rebate rate is attractive can be addressed - markdown rates can be subjective! Figuring (by hand) is dull & inclined to mistake (yet present day spreadsheets are an assistance) Under specific conditions there might be more than one right answer for an IRR issue

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