4. Discounting
It is the conversion of future values into present
values called discounting and requires a rate know
as discounting rate .
Basic principle is that US $ or other currency now is
worth more than a dollar to be received sometime
in future because that present US $ received can be
invested at interest to accumulate more than its
original value
5. PV =Xi/(i+r) t
PV= present value
Xi= amount of money in year T
r=rate of discount expressed as a
proportion
T= number of years from the
present data
6. Example :
Receiving US $ 100,000 now is better
than receiving US$ 100,000 in a year's
time, reason is , it would not be
worthful in future.
7. To compare costs and benefits that
occure in different years it is necessary
to convert their value into present value
.It can be done with the help of
discounting.
When all cost and benefits are
converted to present value it is possible
to compare them.
This is done by using three decision
making criteria .
9. NET PRESENT VALUE
It is diffrence between sum of the present value
of the benefits and the sum of the present value
of the cost.
NPV= Ƹ Bt/(1+r)t – Ƹ Ct/(1+r)t
If NPV is negative the investment is not worth
while , while a positive NPV indicates only that
the investment might be considered.
10. Internal rate of return
In simpler term the IRR is the interest rate
that will make the investment just break even.
NPV= Ƹ Bt/(1+r)t – Ƹ Ct/(1+r)t=0
If IRR exceeds the minimum acceptable
discount rate is the opportunity cost of
money the project is worth for future
consideration.
11. Benefit cost ratio
It is calculated by dividingthe sum of the
present value of benefits by sum of the
present value of cost.
/
BCR=Ƹ Bt/(1+r)t Ƹ Ct/(1+r)t
An investment is worth
considering if the BCR is greater
than 1.
12. Conclusion
Carrying of cost benefit analysis of
investment in any project requires a
process by which analyst examine where to
invest.
