1- Cost Benefit Analysis

Excludability

The degree to which a supplier can prevent free consumption of a good

Rivalry

The degree to which consumption of a good by one consumer reduces the availability of that good to other consumers

what are the 4 categories of goods

1. Private goods, which are excludable and rival;

2. Club goods, which are excludable and non-rival;

3. Common pool resources, which are non-excludable and rival;

4. Public goods, which are non-excludable and non-rival.

What is the compound interest formula

F=P(1+i)^N

What is the MARR

Minimum acceptable rate of return (represents some idea of how much they think they can ordinarily make out of an investment

What is RoI

Returns on investment

What is the equation for the total future value of the annual payments at the end of the N-th year, F

N ∑ n=1 Cn(1+i)^( N−n)

how to calculate the exponentially increasing annual payments

Cn = C0(1+g) ^(n−1)

how to calculate the final exponentially increasing annual payments

F = C0 [(1+i) N −(1+g) N / i−g]

What is the growth rate

The growth rate is often used to model the way maintenance costs increase as equipment gets older, it can also be used to model the effect of monetary inflation

What is the equation for linearly increasing annual payments

F = C0 [(1+i) N+1 −i(N +1)−1 i 2 ]

What is CapEx

Capital Expenditure which the cost of the project at the start of a project and mostly includes assets, which sometime shave a salvage value that can be recovered at the end of the project

What is OpEx

Operating Expenditure is the cost of the project that occurs at regular intervals throughout the project and mostly includes consumable expense (wages, maintenance costs, energy, raw materials etc.

What is NPV

Net present value (NPV) is often used for comparing different project options in terms of cost and benefit

what is IRR

Internal rate of return (IRR) involves iteratively solving for the rate of return that leads to a zero NPC for a given project.An important criterion is that a successful project should have an IRR greater than or equal to the MARR

What is EAC

Equivalent annual cost (EAC) is used in a situation where a sequence of payments are distributed non-uniformly with time over a project lifetime

What is inflation and deflation

Inflation is when prices go up. Deflation is when prices go down

what is the equation to calculate the effect of inflation

Cn/( (1+ f)^n) = Rn

What is the effect of inflation on real rate of return

P = N ∑ n=1 Cn (1+i)

What are the 2 ways for accounting for inflation in cash flow analysis

1. Use current values for cash flows and current rates of return.

2. Use real values for cash flows and real rates of return.