Running head: ECONOMICS 1

A compendium and comparison of 25 project evaluation techniques. Part 1: Net present value

and rate of return methods

Student Name

Institution

Date
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1. What research questions did the author try to address? Have they been correctly

identified? Expand your research about the background of the problem under

study.

Actually, the entire research has perfectly answered the research questions, whereby

problem has been identified. According Almond and Remer (1979), investors may use

various techniques and methods in order for making wise decisions. Such evaluation

techniques and methods may be employed to individua projects in order to assess if or not

one can invest in each, or rather would be applicable to a number of mutually exclusive

projects with an ultimate purpose of understanding if any must be pursued (Almond and

Remer, 1980). The prospective techniques are mostly beneficial for engineers and corporate

managers. Notwithstanding a number of discussions in regard to the techniques, there is no

single source that rationalizes or rather summarizes the different investment yardsticks. It’s

the expectation and purposes of the paper to explain, compare, and summarize 25 project

assessment technique using a common central source (Au and Au, 1992). The paper also aids

the reader in comprehending the merits and demerits of the targeted techniques alongside the

use of different applications. The research questions include:

 “How fast must this investment grow in order to equal a desired cash Row at a

specific date?”

 How fast must this investment grow to equal $1534 by year 3?

The NPV (Net present value) criteria is known to be the net present worth method

according to Blank and Tarquin (1989). Normally, once references have been made for this

type of technique, it includes a number of same techniques which would utilize similar

economic elements, though sometime would be resolved. Due to this, equivalent worth and

equivalent value is far much a better phrase for grouping the different evaluation processes.
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The Equivalent worth method is thereby conveyed to different equivalence methods, or the

discounted cash flow method. Generally, the NPV criteria technique can thus be divided to 4

exclusive subtopics or rather various time periods they include: future worth technique,

present worth technique, capitalized worth technique and the annual worth technique. In this

case, the present worth technique evaluates each cash flow for a respective project based on a

specific time and thereby solves it following the equivalent dates while making use of the

economic principles as highlighted in the paper. Future worth method thus resolves each to

an equivalent cash flow based on a future date (Canada and Sullivan, 1989).

Canada and White (1980) asserts that the yearly worth technique additionally explains

cashflows of a prospective project, though is wont resolve each to a common cashflow on a

unique timeline. But its yearly worth method always resolves cashflows that have equivalent

series that are equal, normal, and has different sets of years within every analysis. Similarly,

the capitalize worth technique always resolves the cashflow of a project for an equated

amount on an annual cash flow, though based on an infinite time period based on a

prospective date. Assuming that there should be an assumption following the use of various

techniques, the cash flows acquired from each project will be reinvested based on a fixed rate

employed for computing the equivalent worth. It is subtle though crucial assumption that

must be analyzed. Every rate incorporates rate of return, interest rate, the economic factors, as

elaborated in the entire paper. Sometimes, the rate is referred to as MARR. This is based on

the 4 methods which employed similar economic factors, the same results will be yielded

during project evaluation. Hence, just one method will be required to judge the project’s

profitability. Furthermore, using the phrase net present value includes every equivalent

method.

2. What is the author’s approach to answer the research question? What are the

methods used?
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Many methods and techniques have been availed those aids investors in making

crucial economic choices. Such evaluation techniques and methods would be applied in a

number of mutually exclusive projects whose sole purpose if assessing which, if present,

must be pursued (Thuesen and Fabrycky, 1984). The methods are mostly important for all

corporate managers and engineers. No matter the discussion regarding these techniques, there

isn’t any sources that compares or rather summarizes the different investment yardsticks. The

phrase “internal” is the interest rate which does not stand in as external factors like the

MARR, though internally confines the cash flows (Grant, Ireson, and Leavenworth, 1990).

Different names for the technique incorporate interest return rates, return methods,

investment returns, the discounted cash flows, break-even return rate, and the profitability

index. According to the paper, the 1991 survey revealed a decline in the utilization of the IRR

technique from almost 100% to about 90%. But the technique does not involve MARR within

these calculations, since the criteria for acknowledging or rather declining each project is

solely not based on the MARR availability. When the computed internal return rate or rather

a discount rate will be much more compared to MARR of the whole project which ought to

be acknowledged. When the computed discount rate is equal to the MARR the investors will

be indifferent to the anticipated project.

3. How do you evaluate the methods used in the study? What are the advantages?

What are the limitations? Can you think of an alternative way of addressing the

problem?

To evaluate the technique, a unique timeline of the project’s life should be selected

while analyzing. Well, the point during this time will always be the analysis year that is

normally called as shown in the paper (Newman, 1991). One disadvantage of the present

worth method is the repeated projects assumption. This assumes that the cost of the project, if

repeated, remains constant throughout the analysis period. Depending upon the project, this
ECONOMICS 5

assumption may be incorrect. one advantage of the annual worth method is that there is no

need to choose an appropriate number of years. Another advantage of this method is the

simplicity of its results.

Figure 1: Merits and Demerits of method employed

The growth rate of return method typically evaluates project’s return rate during a

specific project’s life. Hence, the method definitely presents and answer to the question as to

how fast an investment growth will be similar to the desired cash flow row based on a

specific timeline. Within the paper there will be computation of two cashflows. Single cash

flow showcases present value of every negative cash flow before the evaluation year. In that

case, the cash flows should be calculated based on the MARR method. Rate of growth returns

therefore can be calculated in a manner similar to the one elaborated for the external and

internal return rate method. Furthermore, the technique is the same to that of IRR as

pinpointed in the entire paper. Every result presented through the growth rate return method

is similar to the NPV technique (Remer & Nieto, 1995).

The articles encompass a two-part paper which presents 25 dissimilar techniques and

methods that are employed in assessing the desirability of projects economic-wise. The 25

methods have been segmented in 5 different sections which include, the ratio technique, and
ECONOMICS 6

accounting techniques. The paper’s main objective is presenting the merits and the limitations

of the project’s evaluation techniques through rationalizing and contrasting each of them.

Various examples have been incorporated in showing how each method can be used. In

section 1, we pinpoint net present value of return techniques. Whilst in section 2 is payback

ratio and accounting techniques elaborated in depth. Consequently, comparison, recap, and a

summary of the 25 techniques have been identified fully in part 2 (Remer, Tu, Carson, and

Ganiy, 1984).

4. Are the conclusions true outcome of the study? If not, what are the best

conclusions to draw from the study?

Actually, according to the paper the conclusions that have been made in the paper are

definitely true and accurate. Investors require tools that they can use in predicting

profitability of a prospective investment. Most definitely it’s the sole purpose for the two-part

paper in comparing the project evaluation technique as a common point of focus. The article

presented a comprehension of the merits and demerits of the techniques alongside the

applications that must be used. To comprehend how these applications can be used for the

project evaluation, the idea of basic engineering economic concept like equivalence, and

economic evaluation elements will be required. But it’s not the paper’s objective to elaborate

the application or rather derivation of economic evaluation elements.

Furthermore, the growth rate return technique solely depends on time period or rather

the analysis year selected for the resolving or rather discounting of each cash flow. Hence,

this might yield the one growth rate for the chosen time period or rather the year of analysis.

But this won’t present the investors the technique for computing the return rate every project

might promise to present within a specific time line of the prospective investment. Rate of

return technique computes the return rate through finding the answer for “7”.
ECONOMICS 7

Reference

Almond, B. and Remer, D.S., 1979. Models for present worth analysis of selected industrial

cash flow patterns. Eng. Process Econ., 4: 455.

Almond, B. and Remer, D.S., 1980. Present worth analysis of capital projects using a

polynomial cash flow model. Eng. Process Econ., 5: 33

Au, T. and Au, T.P., 1992. Engineering Economics for Capital Investment Analysis, 2nd ed.

Prentice-Hall, Englewood Cliffs, NJ.

Blank, L.T. and Tarquin, A.J., 1989. Engineering Economy, 3rd. ed. McGraw-Hill, New

York.

Canada, J.R. and Sullivan, W.G., 1989. Economic Multiattribute Evaluation of Advanced

Manufacturing Systems, Prentice-Hall, Englewood, NJ.

Canada, J.R. and White, J.A. Jr., 1980. Capital Investment Decision Analysis for

Management and Engineering, Prentice-Hall, Englewood Cliffs, NJ.

Grant, E.L., Ireson, W.G. and Leavenworth, R.S., 1990. Principles of Engineering Economy,

8th ed. Wiley, New York.

Newman, D.G., 1991. Engineering Economic Analysis, 4th ed. Engineering Press, San Jose,

CA.

Remer, D. S., & Nieto, A. P. (1995). A compendium and comparison of 25 project evaluation

techniques. part 1: Net present value and rate of return methods. International Journal

of Production Economics, 42(1), 79–96. https://doi.org/10.1016/0925-5273(95)00104-2

Remer, D.S., Tu, J.C., Carson, DE. and Ganiy, S.A., 1984. The state of the art of present

worth analyses of cash flow distributions. Eng. Costs Prod. Econ., 7: 257.
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Shupe, D.S., 1980. What Every Engineering Should Know About Economic Decision

Analysis. Marcel Dekker, New York.

Thuesen, G.J. and Fabrycky, W.J., 1989. Engineering Economy, 7th ed. Prentice-Hall,

Englewood Cliffs, NJ