投资方案的比较和选择

1、SJTUEngineering Economics-The 3rd LectureDr. Hu HaoShanghai Jiao Tong UniversitySJTUAgendaqReview (15)qS1: Principles and Procedure of Project Evaluation (30)q1st Break (1:45-1:55pm)qS2: Comparing Alternatives Part I (50)q2nd Break (2:50-3:00pm)qS3: Comparing Alternatives Part II (60)qS4: Discussion

2、s and Make up (30)SJTUSession 1Principles and Procedure of Project EvaluationSJTUPrinciples 1 & 2qPrinciple 1: Develop the alternatives. The choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.qPrinciple 2: Focus on the differe

3、nces. Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.SJTUPrinciples 3 & 4qPrinciple 3: Use a consistent viewpoint. The prospective outcomes of the alternatives, economic and other, should be consis

4、tently developed from a defined viewpoint (perspective).qPrinciple 4: Use a common unit of measure. Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparisons of the alternatives.SJTUPrinciples 5 & 6qPrinciple 5:

5、Consider all relevant criteria. Selection of a preferred alternative (decision making) requires the use of a criterion (or criteria). The decision process should consider the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or make explicit in a descript

6、ive manner.qPrinciple 6: Make uncertainty explicit. Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison.SJTUPrinciple 7qRevisit your decision Improved decision making results from an adaptive process;

7、 to the extent practicable, initial projected outcomes of the selected alternative and actual results achieved should be subsequently compared.SJTUAnalysis Procedure1 . P r o b l e m r e c o g n i t i o n , formulation, and evaluation1. Problem/need definition 2. Problem/need formulation and evaluat

8、ion.2. Development of the feasible alternatives.3. Synthesis of possible solutions (alternatives)3. Development of the net cash flow for each alternatives. 4. Selection of a criterion (or criteria).4. Analysis, optimization, and evaluation.5. Analysis and comparison of the alternatives. 6. Selection

9、 of the preferred alternative.5. Specification of preferred alternative. 6. Communication.7. Performance monitoring and post-evaluation of results. SJTUSession 2Comparing Alternatives-Part I投资方案的比较和选择投资方案的比较和选择SJTUOutlinesqBasic philosophy for comparing mutually exclusive alternativesqThe study peri

10、odqEquivalent worth methodqRate of return methodqUseful lives different from the study periodqThe capitalized worth methodqMutually exclusive combinations of projectsqComparisons among independent projectsSJTUIntroductionqThis lecture addresses Steps 5 and 6 of the 7-step procedureqMutually exclusiv

11、e alternatives The selection of one of the feasible alternatives excludes the consideration of any other alternatives The mutually exclusive alternatives are of different amounts of capital, different annual revenues and costs and different useful livesSJTUBasic philosophy for comparing mutually exc

12、lusive alternativesqThe choice is one of the feasible alternativesqThe choice must incorporate the fundamental purpose of capital investment (i.e. to obtain at least MARR for each dollar invested) qIncrement Capital Policy(投资增额原则）投资增额原则） The alternatives that requires the minimum investment of capit

13、al and produces satisfactory functional results will be chosen unless the incremental capital associated with an alternative hanging a larger investment can be justified with respect to its incremental savings / benefits.SJTUBasic PolicyqBase alternative Requires the least investment of capital Has

14、a return equal to or greater than the MARRqThree elements of the basic policy Do nothing is a possible alternative The consideration of the differences in expected future outcomes among the alternatives Use of MARR as the economic criterion to determine the acceptability of a capital investmentSJTUI

15、nvestment and Cost SituationsqInvestment situation Investment alternatives are those with initial (or front-end) capital investments that produce positive cash flows from increased revenue, saving through reduced costs, or both. Example: p. 185qCost situation Cost alternatives are those with all neg

16、ative cash flow elements except for a possible positive cash flow element from disposal of assets at the end of the projects life. Example: p. 186qCannot compare with an infeasible alternative (Ex. 5-1 pp. 187-188)SJTUThe Study PeriodqThe study (analysis) period, sometimes called planning horizon, i

17、s the selected time period over which the mutually exclusive alternatives are comparedqInfluencing factors The service time period required The useful life of the shorter-lived alternative The useful life of the longer-lived alternative SJTUThe Study Period (II)qThree situations Useful life is equal

18、 to the study period Useful life is shorter than the study period Useful life is longer than the study periodqInfluencing factors The service time period required The useful life of the shorter-lived alternative The useful life of the longer-lived alternative SJTUTwo Assumptionsq1. The repeatability

19、 assumption The study period is either indefinitely long or equal to a common multiple of the lives of the alternatives The economic consequences that are estimated to happen in an alternatives initial life span will also happen in all succeeding life spans (replacements) Actual situations seldom me

20、et both conditions but the difference is small q2. The co-terminated assumption SJTUC1: Useful life equal to the study periodqNo adjustment to the net cash flow is requiredqEquivalent worth methodsqRate of return methodsSJTUEquivalent worth methodsqEquivalent present, annual or future amountsqBased

21、on total investment at i=MARRqSelection Investment alternatives: the one with the greatest positive equivalent worth Cost alternatives: the one with least negative equivalent worthqExample 5-2SJTURate of Return MethodsqThree Principles Each increment of capital must justify itself by producing a suf

22、ficient rate of return on that increment Compare a higher investment alternative against a lower investment alternative only when the latter is acceptable Select the alternative that requires the largest investment of capital as long as the incremental investment is justified by benefits that earn a

23、t least the MARRSJTUInconsistent Ranking Problem qOccurs with incorrect use of rate of return methodsqExample AlternativeIRRPW(10%)A17.4%9,739B16.3%10,131SJTUqWhen IRRAB=11.4%, PWA=PWBqIRR method assumes reinvestment of cash flows at the calculated rate of return (16.3%, 17.4%)qThe real MARR (MARR=1

24、0%) PWab(10%)=$393 The ranking of A and B is consistentqUse of the incremental investment analysis to avoid incorrect ranking of mutually exclusive alternatives when using rate of return methodsSJTUThe Incremental Investment Analysis ProcedureqP. 197 Figure 5-2SJTUqPp. 196-199 Example 5-4qThree comm

25、on errors of choosing feasible alternatives: With the highest overall IRR on total cash flow With the highest IRR on an incremental investment With the largest investment that has an IRR greater than or equal to the MARRSJTUC2: Useful Life Shorter Than the study periodqThe alternatives with a life s

26、horter than the study period will need its cash flows adjusted in length to equal to the study periodqThe repeatability assumption The selected study period is assumed infinite or a common multiple of the useful livesqCo-terminated assumption The above period assumption doesnt apply Or costs change

27、in subsequent replacementsqExample 5-7SJTUC3: Useful Life Longer Than the study periodqThe repeatability assumption The selected study period is assumed infinite or a common multiple of the useful livesqCo-terminated assumption The above period assumption doesnt applyqThe alternatives with a life lo

28、nger than the study period will need its cash flows truncated to equal the end of the study periodqOne technique often used is to estimate the net salvage value at that point in time from disposal of assets and to account for associated cash flowqExample 5-9SJTUSession 3Comparing Alternatives-Part I

29、ISJTUComparison of Alternatives Using the Capitalized Worth MethodqThe Capitalized Worth (CW) Method The determination of the worth of all receipts and/or expenses over an infinite length of time The capitalized cost method if only expenses are consideredSJTUqSituations The period of needed service

30、is indefinitely long The common multiple of the lives is very long The repeatability assumption is applicableSJTUCalculations of CWqThe CW of a perpetual series of end-of-period uniform payments A P=A(P/A, i%, )=A/I P is called the capital worth of A and is denoted by CWqA series of payments of amou

31、nt $X at the end of each kth period at i% AW=X(A/F, i%, k) CW=X(A/F, i%, k)/iSJTUDefining Mutually Exclusive Investment Alternatives in Terms of Combinations of ProjectsqThree categories of investment projects Mutually exclusive: at most one project out of the group can be chosen Independent: the ch

32、oice of a project is independent of the choice of any other project in the group, so that all or none of the projects may be selected or some number in between Contingent: the choice of a project is conditional on the choice of one or more other projectsSJTUqA general approach is to list all investment projects and enumerate all the feasible combinations projectsqThe combinations of projects will be mutually exclusiveqThe net cash flow of each co