Download Benefit-Cost Analysis: Financial and Economic Appraisal by Harry F. Campbell, Richard P.C. Brown PDF

By Harry F. Campbell, Richard P.C. Brown

Through the textual content of this creation to profit price research, emphasis is on purposes, and a labored case research is gradually undertaken as an example of the analytical rules in operation. the 1st half covers simple idea and techniques. half advances to fabric on the world over tradeable items and initiatives that have an effect on industry costs, and half 3 introduces distinct themes equivalent to the therapy of threat and uncertainty, source of revenue distributional results and the valuation of non-marketed items.

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Extra resources for Benefit-Cost Analysis: Financial and Economic Appraisal using Spreadsheets

Example text

At today’s price, P0, the value of a quantity of coal at time t, Qt, is given by P0 Qt. The present value of the coal, using the 34 Benefit-Cost Analysis real rate of interest, r, is given by P0 Qt/(1+r)t. At the inflated price of coal its value at time t is given by P0(1+i)t Qt where i is the annual inflation rate. The present value, at the money rate of interest, m, is given by P0Qt (1+i)t/(1+m)t, or P0Qt [(1+i)/(1+m)]t. Since (1+i)/(1+m) is approximately equal to 1/(1+m–i), where m–i = r is the real rate of interest, the two procedures give essentially the same result.

Can we say that B is preferred to A because $125–$100 is greater than $120–$100? Obviously not as this calculation ignores the timing of cash inflows and outflows: they are not the same. We need to discount all future values to derive their equivalent present values. How do we accomplish this? From the previous Chapter we saw that we need to derive the appropriate discount factor. What is the present value (PV) of $100 a year from now assuming a discount rate of 10% per annum? 909” in this example is the discount factor.

Annuity Tables (see Appendix 2, p. 341) provide us with the values of the cumulative discount factors for all discount rates and years. 170. 3: Using the Annuity Table Find the NPV of an investment with an initial cost of $1000 and an annual return of $500 for three years, when the discount rate is 4%. 775.

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