By Harry F. Campbell, Richard P.C. Brown
In the course of the textual content of this advent to learn expense research, emphasis is on purposes, and a labored case research is steadily undertaken for instance of the analytical rules in operation. the 1st half covers easy idea and tactics. half advances to fabric on the world over tradeable items and initiatives that have an effect on marketplace costs, and half 3 introduces certain issues corresponding to the therapy of possibility and uncertainty, source of revenue distributional results and the valuation of non-marketed items.
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Additional resources for Benefit-Cost Analysis: Financial and Economic Appraisal using Spreadsheets
1. Undertaking the investment provides a return which allows the individual to spend more on consumption goods in year 2 than her income from other sources. 1. How is the investor to decide whether it is worthwhile undertaking the project? To be worthwhile, clearly the project must be at least as good an investment as putting the money to be expended on the project in the bank instead. How does the return on the investment compare with the alternative of placing the savings in the bank? 1. Both these approaches recognize the “time value of money”, which means that dollars at different points of time cannot be directly compared.
If the scarce resources are used in an alternative way – such as investing in refurbishing the basement of an individual’s house – the opportunity cost of that alternative project is given by the present value of the benefits of the marginal project. In other words, discounting the alternative project by the market rate of interest and following the NPV>0 rule ensures that the benefits of the alternative project are at least as high as those of the marginal project it displaces. It was suggested that, whatever the levels of income the individual earned in the two years, she could lend or borrow at the market rate of interest to obtain the desired consumption profile: this was described as trading along the net present value line passing through the point representing the income profile.
There are two main advantages: first, it is helpful to know what the computer is doing so that you can recognize an absurd result if it appears because of some programming error you may have made – such as asking for an IRR when there will be at least two positive values which may be difficult to interpret in the project appraisal. Secondly, you may be parted from your computer – it may have gone to New Caledonia while you went to Papua New Guinea (take it as hand luggage next time), or you may both be in New Caledonia but you forgot to take the adaptor plug and the batteries are low, or you were called unexpectedly into a meeting where you are supposed to provide a “back of the envelope assessment” of the project, but you left your computer at the hotel!
Benefit-Cost Analysis: Financial and Economic Appraisal using Spreadsheets by Harry F. Campbell, Richard P.C. Brown